Braspetro Oil Services Company & Anor v FPSO Construction Inc & Anor

THE PARTIES

This trial of preliminary issues (see paragraphs (175) to (180) below) relates to two major offshore construction projects:

The P38 and P40 projects are referred to below as “the Projects”. Folio 491 is concerned with P40; Folio 492 with P38.

The second claimant in these proceedings is Petroleo Brasileiro SA, the Brazilian oil company (“Petrobras”). Petrobras is and was at all material times an oil and gas company in the business of, amongst other things, developing oil reserves off Brazil. Once wells have been drilled at a particular location offshore, Petrobras needs either fixed or floating systems to produce the oil, process it, store it and off load it by pipeline or shuttle tankers to a refinery. Both P38 and P40 were to be operated by Petrobras at a field being developed by Petrobras called “South Marlin” (or "Marlim Sul", in Portuguese) over a number of years. Floating production systems like P40 are specially designed and engineered to suit the characteristics of a particular field and they are intended to operate on an uninterrupted basis over a number of years producing oil at a certain capacity of barrels of oil per day (until the oil reserves are exhausted).

The first claimant in these proceedings is Braspetro Oil Services Company (“Brasoil”). Brasoil is incorporated in the Cayman Islands. It is an indirect offshore subsidiary of Petrobras. Any reference in this judgment to a contention being Petrobras’ case is to be taken as meaning that it is the case of both the claimants.

Brasoil contracted to charter (and ultimately purchase) the units, and separately agreed to bareboat sub-charter them to Petrobras as the end user / operator. Both units however needed to be converted to suit Petrobras’ requirements as operator for South Marlin.

The VLCC and crane barge destined to become P38 and P40 were purchased by special purpose companies established by Mitsubishi Corporation (Petro Dia I and Petro Dia II – the “Petro Dia companies”) from Drillpetro Inc. and FPSO Partners LLC, respectively, companies within the Maritima Group or otherwise under the control of Mr. German Efromovich and others. Mitsubishi Corporation's role (acting through the Petro Dia companies) was limited to (i) the provision of financing for the purchase of the VLCC/crane-barge; (ii) the provision of financing for the conversion of those vessels into P38 and P40; and (iii) making arrangements for such conversion (see below). Separately, Brasoil contracted with the Petro Dia companies to bareboat charter and purchase the units, and in turn agreed to sub-charter them to Petrobras as operator.

The Petro Dia companies agreed with Brasoil to procure the conversion of each unit, but were to fulfil that obligation to Brasoil by entering into a contract with the second defendants in each action.

The defendants are all single-purpose companies incorporated in the Bahamas for the purposes of the Projects. They were established by Maritima Petroleo E Engenharia Ltda (‘Maritima’), whose Managing Partner was (and is) Mr German Efromovich. According to Mr Efromovich the defendants are not within Maritima’s ownership – they are part of the Synergy group which is ultimately held in trust for Mr Efromovich and his brother. Maritima was at all material times a Brazilian company involved in the management of projects for the construction of drilling rigs and production platforms.

The conversions in the case of each of P38 and P40 were contracted for between the Petro Dia companies and the second defendants in each action (referred to individually and collectively as “FEI”) pursuant to Conversion Contracts. By the Conversion Contracts FEI agreed with the Petro Dia companies to procure the conversions, but were to fulfil that obligation to the Petro Dia companies by entering into contracts with the first defendants in each action for the carrying out of all work necessary to convert the units to the stipulated specifications. FEI duly concluded contracts (the "Full Conversion Contracts") with the first defendants (referred to individually and collectively as “FCI”), whereby FCI agreed with FEI to undertake and complete the conversions in each case to the requisite specifications and by a fixed date (the "Redelivery Date").

The conversion works involved, inter alia (i) the performance of detailed design and engineering work (ii) the procurement of equipment, materials and services from a wide range and number of sub contractors and third party suppliers and (iii) the performance of construction and installation work by a shipyard. The latter was undertaken by Jurong Shipyard Limited (“Jurong”) in Singapore, based on design and engineering work performed primarily in Brazil, and incorporating equipment manufactured and/or supplied by various third party suppliers during 1997-2000. Both P38 and P40 are now operating successfully offshore Brazil for Petrobras.

The Projects were governed by complex contractual structures, as illustrated by the charts in Appendix A (P38) and Appendix B (P40). The Petro Dia companies purchased the units and chartered them “as is, where is” to Brasoil for a period of 12 years under Bareboat Charter and Purchase Agreements, on terms that ownership of the units would pass to Brasoil at the end of the period provided they had fulfilled their obligations under the agreements. Brasoil sub-chartered the units to Petrobras under Bareboat Sub-Charter Agreements. The charter hire payable by Petrobras as end user / operator to Brasoil under the Bareboat Sub-Charter Agreements and by Brasoil to the Petro Dia companies under the Bareboat Charter and Purchase Agreements was at a daily rate of US$59,690 for P38 and US$129,750 for P40. The Petro Dia companies borrowed monies from Mitsubishi and Exim Bank (as lenders) to finance the purchase and conversion of the units against the security, amongst other things, of the hire payable by Brasoil (funded by the hire payable to it by Petrobras as end-user and operator of the units). The hire was payable by Petrobras to Brasoil and by Brasoil to the Petro Dia companies on “hell or high” water terms (namely in all events) irrespective of the availability, condition or conversion of the units. This reflected the overall contractual structure by which the Petro Dia companies were not intended to (and did not) assume any of the risks associated with the purchase and conversion of the units. It is common ground that as between the Petro Dia companies and Brasoil/Petrobras, the Petro Dia companies would not bear any "construction" or other risk. There is an issue between Brasoil/Petrobras and FCI about whether FCI were intended to bear the risks associated with the conversion of the units.

The Bareboat Charter and Purchase Agreements provided in each case (a) that the Petro Dia companies were to procure that each unit was converted within a stipulated time-frame in accordance with an “agreed specification” (which was to be annexed to the Bareboat Sub-Charter Agreements), and (b) that they fulfilled those obligations to Brasoil by entering into contracts with FEI for conversion of the units in accordance with the “agreed specification”. There is a dispute between the parties as to (a) whether or not there was an “agreed specification” that was annexed to either Bareboat Charter and Purchase Agreement or Bareboat Sub-Charter Agreement; (b) what that specification comprised; and (c) whether it was sufficiently certain. Such matters are not for determination in the current trial.

The Petro Dia companies entered into Conversion Contracts with FEI, whereby FEI undertook to the Petro Dia companies to procure that the units would be converted in accordance with the specifications annexed to the Bareboat Charter and Purchase Agreements to the satisfaction of Brasoil and Petrobras within the time-frame stipulated in the Bareboat Charter and Purchase Agreements. Neither Brasoil nor Petrobras were a party to the Conversion Contracts.

The Conversion Contracts, in turn, provided that FEI had determined to fulfil their obligations to the Petro Dia companies by entering into Full Conversion Contracts with FCI whereby, for payment by FEI of a fixed sum, FCI undertook to carry out all work necessary to convert the units in accordance with the specifications to the satisfaction of Petro Dia I/II, Petrobras and Brasoil and within a fixed period (subject to (a) Brasoil’s approval of the terms of the contract (other than the price) and the identity of the contractor; and (b) FEI agreeing to procure that the Full Conversion Contracts would contain terms that FEI’s rights and obligations under the Full Conversion Contracts were to be transferable to Brasoil or its nominees). Petrobras/Brasoil were not party to the Conversion Contracts. However, by Clause 4 of the Conversion Contracts FEI agreed to provide security (by guarantee, bond or otherwise) to Brasoil for the due and punctual performance of the Conversion Work. No bond was provided.

The fixed sum price (for P38 US$130 million, for P40 US$324 million) was payable by the Petro Dia companies to FEI within 7 days of provision to Petro Dia I/II (as applicable) of a copy of an executed copy of the Full Conversion Contract and of the first Service Authorisation signed by Brasoil. The first Service Authorisation was the trigger for the time within which the relevant project had to be completed (Conversion Contracts, clause 3.1). However, Supplemental Agreements entered into by FEI and Petro Dia I/II provided by clause 2.1 for the fixed sum price in each case to be paid into a specified bank account, charged in favour of Petro Dia I/II as security for performance of the contracted works. From the bank account Petro Dia I/II would permit the release of money and its remittance to FEI as needed so as to enable timely payments, in turn, to be made by FEI to FCI (clause 3, Supplemental Contracts and by Deposit Charge and Assignment Agreements entered into by the same parties). The release of such funds was to be permitted against written demand from FEI and provision of Progress Certificates countersigned, inter alia, by Brasoil, which Progress Certificates were intended to match milestone payments under the applicable Full Conversion Contract (clauses 4.1 and 4.2, Supplemental Agreements).

Full Conversion Contracts were entered into by FEI and FCI as contemplated by the Conversion Contracts.

FCI contends that this fulfilled FEI’s obligations to the Petro Dia companies under the Conversion Contracts. Petrobras does not accept this.

Neither Brasoil nor Petrobras were a party to the Full Conversion Contracts. FCI undertook to FEI under the Full Conversion Contracts to carry out and complete the works required to upgrade the units and to render them in a condition fully complying with the requirements of the Full Conversion Contracts, the “agreed specification” annexed to the Bareboat Charter and Purchase Agreements, and the Principal Drawings (as defined). Payment of the fixed price by FEI to FCI was to be made in instalments according to a contractual Milestone Schedule and FCI was to provide to FEI a performance bond as a precondition to FEI making any instalment payment to FCI.

Brasoil and Petrobras, the Petro Dia companies and FEI and FCI also entered into Supervision Agreements to give Brasoil (with the consent of the Petro Dia companies as owners and Petrobras as intended operator) rights of supervision and approval in respect of the conversion works.

The Supervision Agreement for P40 provided inter alia as follows: -

“Whereas:

(A)

In terms of the Bareboat Charter and Purchase Agreement, Petro Dia has undertaken to Brasoil to procure that, subject to the provisions of the Release Letter dated 7 August 1997 and issued by Brasoil in favour of Petro Dia (“Release Letter”), the Platform is converted in accordance with the Specification (as this term is defined in the Bareboat Charter and Purchase Agreement) to the satisfaction of Brasoil and Petrobras within a specified period;

(B)

In terms of the Conversion Contract FPSO Engeneering has undertaken to Petro Dia to ensure the Platform is converted in accordance with the Specification (as this term is defined in the Conversion Contract) within a specified period; and

(C)

In terms of the Full Conversion Contract, FPSO Construction has undertaken to FPSO Engeneering to ensure that the Platform is converted in accordance with the Specification within a specified period.

…

“Contracts” means the contracts entered or to be entered into by FPSO Engeneering and/or FPSO Construction and a Conversion Contractor, including the Shipyard Contract, for the Work and “Contract” means any of such contracts as the context may require;

“Conversion Contract” means the agreement between Petro Dia and FPSO Engeneering dated 7 August 1997 in respect of the Conversion of the Platform;

“Conversion”means the Conversion of the Platform in accordance with the Specification;

“Conversion Contractors”means the Shipyard and other Suppliers approved by Brasoil for the Conversion of the Platform;

“Full Conversion Contract” means the agreement between FPSO Engeneering and FPSO Construction to be entered into in respect of the Conversion of the Platform;

“Good Industry Practice” means the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected from a skilled and experienced Supervisor acting in good faith and engaged in the same type of activity as that of Brasoil hereunder under the same or similar circumstances in a similar location;

“Platform” means the PB 200 semi-submersible platform registered in Panama (to be named “Petrobras 40”) as converted or to be converted in accordance with the Specification;

“Shipyard” means any shipyard appointed by FPSO Engeneering and/or FPSO Construction and approved by Brasoil in respect of the Conversion of the Platform;

“Shipyard Contract” means any contract between FPSO Engneering and/or FPSO Construction and a Shipyard or Shipyards in respect of the Conversion of the Platform;

“Specification” means the specification prepared by Petrobras for the Conversion of the Platform (annexed to the Bareboat Sub-Charter Agreement), in accordance with the provisions of the Full Conversion Contract, as amended from time to time;

“Suppliers” means the Shipyard and any other supplier, dealer, manufacturer, contractor, consultant, engineer, designer, surveyor or any other person who supplies, constructs, installs or otherwise provides any equipment or services to FPSO Engeneering and/or FPSO Construction under any of the Contracts; and

“Work”means the performance of services and other works and the supply of equipment by the Conversion Contractors pursuant to and in accordance with the Contracts.

2.

General Right of Supervision

Petrobras, FPSO Engeneering and FPSO Construction hereby grant to Brasoil or its nominee certain rights of supervision and approval in respect of the carrying out of Work by the Conversion Contractors upon the terms and conditions set out in this Agreement. FPSO Engeneering and FPSO Construction each agrees, where appropriate, to act in accordance with and/or be bound by the exercise of those rights, in accordance with the terms and conditions set out herein.

For the avoidance of doubt, neither Brasoil nor Petrobras shall assume liability under any Contract by the exercise of these rights of supervision and approval, except on the issuance by Brasoil of the notice as provided by Clause 3 of this Agreement.

3.

Assignment

3.1

FPSO Engeneering and/or FPSO Construction hereby assign and agree to assign to Brasoil all title, benefit and interest in each any of the Contracts, such assignment to become effective only on the service of a notice in writing by Brasoil to each party to the relevant Contract(s).

3.2

FPSO Engeneering and FPSO Construction shall ensure that no Contract to which they are a party includes a provision prohibiting the assignment referred to in Clause 3.1 above.

4.

Specific Rights of Supervision

4.1

Brasoil shall be entitled to approve: -

i)

the Conversion Contractors;

ii)

the Contracts other than price;

iii)

any plans, drawings, specifications, calculations and other matters required under the terms of the Contracts and changes thereto; and

iv)

the material, workmanship and manner of construction and installation of the Work.

v)

any claim from any of the Conversion Contractors for an extension of time for the completion of the Work; and

vi)

any change proposed by any of the Conversion Contractors or FPSO Engeneering and/or FPSO Construction to any plans, drawings, specifications, calculations, Contracts and other matters under or in relation to the Contracts.

4.2

Brasoil shall be entitled, at its reasonable discretion, to require FPSO Engeneering and/or FPSO Construction:

4.2.1

promptly to provide to the relevant Conversion Contractor details of any material defect or deficiency which Brasoil may discover in any item of the Work during the term of any warranty or guarantee and take such steps as Brasoil reasonably considers necessary to obtain performance by that Conversion Contractor of its obligations under such warranty or guarantee;

4.2.2

to reject any item or part thereof of the Work that is not in accordance with the Contracts on delivery or following the relevant supply or on completion of such Work and/or to pursue such remedies as are available to FPSO Engeneering and/or FPSO Construction under or in connection with the Contracts;

and FPSO Engeneering and FPSO Construction shall act forthwith in accordance with such requirements.

4.3

FPSO Engeneering and FPSO Construction shall not, without Brasoil’s prior written consent (which shall not be unreasonably withheld):

4.3.1

agree to amend, vary, alter or modify the Contracts whether by executing further contractual documentation or by waiving breaches, forbearance or otherwise howsoever; or

4.3.2

enter into any Contract other than a Contract with a value of less than US$1 million.

4.4

FPSO Engeneering and FPSO Construction shall not issue any progress or completion certificates under the Contracts unless it has been approved by and signed by or on behalf of Brasoil, and FPSO Engeneering and FPSO Construction shall ensure that each of the Contracts contains a provision providing that any such certificates that are to be issued shall be validly issued only when approved and signed in this manner.

5.

Attendance at Meetings, Inspection and Testing

5.1

Brasoil shall be entitled to have one or more representatives present at any time on 3 days written notice to FPSO Engeneering and/or FPSO Construction (except in the case of matters deemed by Brasoil to be urgent, where no notice is required) and:

5.1.1

at all inspections carried out by or on behalf of FPSO Engeneering and/or FPSO Construction of the Work;

5.1.2

at all testing of the Work carried out by any Conversion Contractor;

5.1.3

upon acceptance of the Work.

5.2

Notwithstanding Clause 5.1 above FPSO Engeneering, FPSO Construction and Brasoil shall meet on a regular basis (but not less than once per month) to discuss the progress of the Work and FPSO Engeneering and FPSO Construction shall, in the performance of their obligations and exercise of its rights under the Contracts, take into account any recommendations Brasoil may make at such meetings regarding such progress.

6.

Change Orders

6.1

Brasoil shall be entitled to instruct FPSO Engeneering and/or FPSO Construction to propose:

6.1.1

any alteration to the Specification; or

6.1.2

any change to any plan, drawing, specification, calculation or other document submitted to Brasoil pursuant to Clause 9.1.3.

6.2

On receipt of an instruction pursuant to this Clause 6.1 FPSO Engeneering and FPSO Construction shall be obliged to use their best endeavours to agree the alteration(s) or change(s) set out in that instruction with the relevant Conversion Contractor(s) pursuant to the terms of the relevant Contracts. If FPSO Engeneering and FPSO Construction and the relevant Conversion Contractors fail to agree on the alteration(s) or change(s) within fourteen (14) days of receipt by FPSO Engeneering and/or FPSO Construction of such proposal, Brasoil shall be entitled to require FPSO Engeneering and/or FPSO Construction to take such steps as may be appropriate to enable the alteration or change to be effected. If the impact of the alteration or change cannot be agreed, Brasoil shall be entitled to refer the dispute to such expert resolution as the President for the time being of the London Maritime Arbitrators Association deems appropriate to determine, inter alia, the matters referred to in Clauses 6.2.1 and 6.2.2 below. Any alteration or change so agreed or determined shall be evidenced in writing which shall specify: -

6.2.1

any increase or decrease in the cost to enable such alteration or change to be made; and

6.2.2

such extension of any relevant testing, delivery, acceptance or completion date as will enable the alteration or change to be made.

6.3

For the purposes of the Bareboat Charter and Purchase Agreement and the Conversion Contract it is hereby confirmed and agreed (in the case of the Bareboat Charter and Purchase Agreement, such confirmation and agreement being without prejudice to the provisions of the Release Letter) that:

6.3.1

the definition of the term “Specification” in each such document shall be amended so as to have the same meaning as is given to such term in this Agreement;

6.3.2

If and whenever any change, alteration or extension shall be agreed or determined for the purposes of this Supervision Agreement and/or the Full Conversion Contract and/or any of the Contracts which relates to:

i)

the Specification, and/or

ii)

any plans, drawings, specifications, calculations, Contracts or other documents or in respect of any other matters which relate thereto, and/or

iii)

the basic characteristics of the Platform and/or the Specification and/or any plan or drawings which may (consequent upon the making of any alteration or change) be agreed or determined for the purposes of the foregoing provisions of this Clause 6.3.2, and/or

iv)

any extension of any relevant testing, delivery, acceptance, completion or other date as needed either to enable any such alteration or change to be made or otherwise howsoever,

then such change, alteration or extension shall also apply in relation to the obligations of Petro Dia and the Contractor under the Bareboat Charter and Purchase Agreement and the Conversion Contract respectively, to the intent that those provisions of the Bareboat Charter and Purchase Agreement which relate to the Conversion and the provisions of the Conversion Contract shall (in the case of the Bareboat Charter and Purchase Agreement, without prejudice to the provisions of the Release Letter) be read and construed accordingly.

6.4

Brasoil will pay directly to FPSO Engeneering and/or FPSO Construction such increase (if any) in the cost specified pursuant to Clause 6.2.1 above on such terms as Brasoil, FPSO Engeneering and FPSO Construction may agree from time to time.

…

8.

Brasoil’s Obligations and Responsibility

8.1

In exercising any of its rights hereunder Brasoil shall act in accordance with Good Industry Practice and, as far as it is within their responsibility and control, ensure that no act or omission by it prevents the due and punctual observance and performance of all conditions, duties and obligations imposed on FPSO Engeneering and/or FPSO Construction by the contracts. In the event of any failure by Brasoil to meet its foregoing obligations it shall be liable to FPSO Engeneering and/or FPSO Construction for any additional cost or expense arising from such failure.

8.2

Brasoil shall immediately notify FPSO Engeneering and FPSO Construction of any matters of which it becomes aware which might give rise to claims against any Conversion Contractor under any Contract and shall provide and extend all reasonable assistance and co-operation to FPSO Engeneering and/or FPSO Construction and/or its representatives in connection with any actual or possible claims against any Conversion Contractor under any Contract.

8.3

Brasoil undertakes to Petro Dia that it will:

8.3.1

permit and/or procure that Petro Dia has access to the reports/information periodically issued by FPSO Construction, FPSO Engeneering, or the Shipyard, related to the Work, as Petro Dia may from time to time reasonably request;

8.3.2

withhold its approval of any Contract which does not include provision for rights of access and inspection for Petro Dia and its representatives as is provided for in Clause 9.1.3; and

8.3.3

use such powers as it may have to procure compliance on the part of FPSO Engeneering and FPSO Construction with their obligations under Clause 9.1.3.

8.4

Notwithstanding the exercise by Brasoil of any of its rights under this Agreement in the manner set out in this Clause 8, FPSO Engeneering and FPSO Construction shall be entirely and solely responsible for their acts and the acts of their agents, employees and representatives engaged in connection with the Conversion of the Platform.

9 FPSO Engeneering and FPSO Construction’s Obligations

9.1

FPSO Engeneering and FPSO Construction shall:

9.1.1

ensure that Brasoil receives advance notice of all meetings, inspections and tests at which it is entitled to be present pursuant to Clause 5;

9.1.2

permit and/or procure such access to the premises of any Conversion Contractor where any Work or manufacture in connection with the Conversion of the Platform is taking place as Brasoil requires in order to exercise its rights hereunder without restriction or delay and ensure that provision for such rights of access is contained in each Contract;

9.1.3

permit and/or procure permission from all Conversion Contractors for Petro Dia and/or their representatives on 10 days’ written notice to inspect the Platform and the Work (provided that Petro Dia shall have confirmed that they and/or, as the case may be, their representatives will not interfere with the progress of the Work), and ensure that provision for such rights of access and inspection is contained in each Contract;

9.1.4

ensure that Brasoil receives copies of:-

i)

all plans, drawings, specifications or calculations; and

ii)

notices, applications or certificates;

which FPSO Engeneering and/or FPSO Construction receive pursuant to the Contracts, within 5 days of receipt thereof.

9.2

For the avoidance of doubt this Agreement does not grant Brasoil any right to instruct directly the Shipyard or other Conversion Contractor to make any modification to the Work.”

The Supervision Agreement for P38 was on identical terms, logically amended to reflect the different parties involved in that project.

Additionally, Brasoil was given the right under Step-In Agreements to have the Conversion Contracts novated to them in the event of certain specified defaults by FEI.

The majority of the contractual documentation for P40 was signed on or about 7 August 1997, and for P38 on or about 17 March 1998. Work was authorised to commence in respect of P40 on or about 8 October 1997 and in respect of P38 on or about 18 March 1998. The Step-In and Supervision Agreements were signed on 11 December 1997. The Full Conversion Contract for P40 was signed on 10 December 1997.

FCI entered into numerous sub-contracts with third party sub-contractors and vendors for the supply of the requisite equipment, materials and services.

The most important sub-contractor was Jurong, the shipyard in Singapore where the units were located, for the majority of the conversion works. Jurong carried out most of the major structural work on the units, particularly the steelwork, pursuant to contracts dated 18 April 1998 (P38) and 17 January 1998 (P40). Petrobras’ ‘P37’ project was also carried out at Jurong; this project was close to completion by early 1999.

Other major suppliers included: Bluewater Terminal Systems NV, suppliers of the turret mooring system for the P38 unit; Nuovo Pignone, suppliers of the turbo compressor modules; Wärtsilä NSD Corporation, suppliers of generator sets; Hydralift, suppliers of offshore cranes; and ABB, suppliers of VAC, electrical panels, EGCP and other items.

The engineering design work was mostly sub-contracted by FCI. A number of functions performed by individuals associated with FCI were provided on a consultancy basis.

Petrobras and Brasoil are claiming US$82,329,343.74 from FEI and FCI in relation to P38 and US$173,364,614.24 in relation to P40 under Side Letter Agreements, declaratory or alternative relief and interest.

In respect of P40, Petrobras and Brasoil rely upon approximately 850 Side Letter Agreements to make some 3,200 claims in respect of payments totalling US$173,364,614.24 made to 256 third party suppliers. In relation to P38, the claimants rely upon approximately 650 Side Letter Agreements to make some 1,900 claims totalling US$82,329,343.74 in respect of payments made to 173 third party suppliers.

The defendants dispute the claims and advance cross-claims under clauses 6 and 8 of the Supervision Agreements and further cross-claims on a quantum meruit basis, as set out in the respective Defences and Counterclaims.

Paragraphs [31] to [174] have been agreed by the parties, not as an exhaustive account of the background facts but as a case memorandum to assist the Court. There is a dispute between the parties as to what is proper factual matrix for the purposes of the preliminary issues and many facts are disputed. Where points of difference arise these are set out. I reproduce paragraphs [31] to [174] in full, as a lengthy but helpful statement of background facts which serves to underline the extent of the disputes between the parties. Further this statement should assist with the future case management of this litigation.

By September 1998, Petrobras/Brasoil were concerned to a degree at the progress (or lack of it) on the P40 project. The responsibility for this lack of progress is in dispute between the parties.

In response to correspondence on this issue, FCI on 29 September 1998 wrote to Brasoil setting out what FCI considered to be modifications to the contract by Brasoil and their impact, noting revision of the target completion date for the project to 30 April 2000, and informing Brasoil that FCI would be further revising the project schedule and that a Change Order Request would be issued to identify the potential schedule and cost impact attributed to the changes outlined. The letter was accompanied by a listing of Change Orders. The revised date compared with the contractually envisaged completion date of 8 October 1999. It is common ground that any postponement of completion would have significant financial consequences for Petrobras: in addition to the losses arising from delayed commencement of oil production, Petrobras was obliged to continue making loan repayments (in the form of bareboat hire) to Petro Dia I/II, notwithstanding that it would not have use of the unit. Petrobras would find itself paying for use of a unit which it could not use because it had not been completed.

It is Petrobras’ case that by the end of October 1998, physical progress on the P40 project was being reported at around 43.25%, and the cumulative total of milestone payments (including the payment claimed in relation to progress in October 1998) amounted to US$156,448,042 of the original fixed price sum of US$324 million. (See the P40 Project Measurement Report for October 1998 and the P40 Project Measurement Report (Physical)).

During the later part of 1998 and the earlier part of 1999, Petrobras and a consortium involving Maritima were also engaged on the P37 project, which was also underway at Jurong and which was closer to completion and delivery to Petrobras. The P37 project was suffering from some difficulties at that stage. It is Petrobras’ case that there were difficulties with suppliers and sub-contractors who had not been paid by FCI and who had threatened to take action, including the withholding of equipment, materials and services and the seizure of equipment. This is denied by FCI. An escrow account was established on the P37 project through which the remaining balance of the contract funds available under the relevant loan agreement were to be channelled, which enabled Petrobras/Brasoil to control the amounts and destinations of the final payments to be made to the unpaid sub-contractors. It is common ground that Jurong were carrying out the conversion of P37 and that Petrobras took control of payments to suppliers.

It is Petrobras’ case that its concerns about the progress of the P38 and P40 projects became more acute towards mid 1999 (as set out in a letter to Maritima of 15 July 1999). By this point, Petrobras contends that the delays in the progress of the Projects had become a lot more serious, and the Projects were substantially behind schedule.

It is Petrobras’ case that it appeared to the Petrobras personnel concerned (in particular, Mr Musa and Mr Orlando) that the primary problem related to FCI’s relationship with and control of the main sub-contractor on the Projects, Jurong, although they also identified that FCI were failing to place purchase orders with suppliers and sub-contractors on time, which also had an impact on progress.

The problems with Jurong related to the issue of work which they were instructed to do by FCI and which Jurong claimed to be additional to the scope of work per the sub-contracts. Some such work did relate to genuine Change Orders that Brasoil had issued to FCI. However, to a substantial degree the problems arose from disputes as to whether particular work fell within the scope of the sub-contracts, or whether it was additional work for which Jurong were entitled to additional remuneration.

It is alleged by Petrobras that this derived in substantial measure from the discrepancy between the scope of FCI’s work under the Full Conversion Contracts and the scope of Jurong’s work under FCI’s sub-contracts with Jurong.

Amendments to the P40 sub-contract between FCI and Jurong were entered into on 26 March 1999 (whereby FCI agreed to pay an additional lump sum of US$1,550,000 for certain work) and 20 April 1999 (whereby FCI agreed to pay an additional lump sum of US$10,350,000 for certain work). In addition, Jurong were submitting substantial numbers of variation orders, of which relatively few were approved by FCI.

Jurong attributed the difficulties in progress, which they acknowledged, to FCI’s unwillingness to settle the variation orders submitted by Jurong expeditiously and in a fair manner, and also to FCI’s failure to finalise the requisite drawings. FCI did not accept this then and do not accept this now.

By April 1999, Mr. Efromovich was involved in a number of significant contracts which were to provide Petrobras with production capacity for its offshore development plans, including P38 and P40. He was also involved in contracts for the provision of six Amethyst drilling rigs and related services. These contracts were awarded by Petrobras after a tender process. The rigs were to be built and chartered to Petrobras by a joint venture between companies controlled by German Efromovich and Pride International (a Houston based drilling company) on the basis of a design for an existing drilling rig, Amethyst 1 and hence became known as the Amethyst rigs 2, 3, 4, 5, 6 & 7. Maritima were also to provide certain services relating to their operation. In due course, Petrobras cancelled all of the contracts (in May and October 1999) on grounds of alleged delay. The cancellation of the contracts became the subject of litigation in Brazil.

Maritima had enjoyed a longstanding relationship with Petrobras, operating in partnership with Stena Offshore (part of the Stena group) for a number of years and thereafter in its own right. Mr Efromovich’s relationship with Petrobras would entail almost daily visits to Petrobras when in Rio, and a high degree of trust and cooperation had been built up between the Maritima group and Petrobras. The relationship was a successful one for both parties.

Petrobras contends that any earlier relationship that may have existed is not relevant to events in April 2000. It does accept that the historical relationship is broadly relevant as background, and that the relationship had deteriorated due to disputes in relation, inter alia, to progress and cost overruns on a number of different projects by April 2000 and any historically positive relationship would not bear on a situation where there were substantial disputes. Further Petrobras contends that the P38 and P40 projects were not a success because Petrobras/Brasoil had become obliged to inject substantial funds to secure completion of the Projects.

FCI say that the Projects were a success – there is no claim by Petrobras over quality; there is no claim by Petrobras for delay. Both units are operating successfully.

Petrobras was in April 2000 a state owned organisation. The President of Petrobras was appointed by the government. A new President, Mr Henri Reichstul, was appointed by the President of Brazil in March 1999. Mr Reichstul in turn appointed a new Board. Two of the positions on the Board were that of Director of Exploration and Production (E&P) and Director of Engineering (SEGEN). The former appointee was Mr Coutinho Barbosa and the latter Mr Menezes. The new Board in turn made changes to the senior personnel within SEGEN, the part of Petrobras responsible for the engineering, construction and procurement aspects of equipment and technical requirements on Petrobras projects, and responsible for P38 and P40.

It is FCI’s case that the introduction of the new Board led to a change of policy towards Mr Efromovich and the deterioration in their relationship.

Mr Reichstul, following his appointment as President, became concerned about the concentration of projects in the hands of “the Maritima affiliated companies”, and about the alleged cost and time overruns which had the potential to affect Petrobras’ oil production targets. Mr Reichtstul’s evidence is that the combined value of the five FSO/FPSO construction and conversion projects whose management had been entrusted to the “Maritima related companies” was in excess of US$ 1.2 billion and he says that he was concerned about Petrobras’ risk exposure given their concentration in the hands of effectively one contractor.

President Reichstul was brought in to Petrobras with the aim that he would make Petrobras more presentable to the international market. However, within days of taking up his appointment, he was sent a copy of an anonymous complaint known as the “Blue Report”. On 14 June 1999, he was also sent a copy of an anonymous letter sent to the Federal Budget Oversight Board referring to the “Blue Report” and complaining about Petrobras’ approach to the Amethyst drilling rigs. The letter sought to criticise Petrobras as well as President Reichstul personally and also the Minister for Mines and Energy for not cancelling the Amethyst 4, 5, 6 and 7 Platforms, Petrobras having already cancelled Amethysts 2 and 3 in May 1999. The letter was also critical of Mr. Efromovich and Maritima.

The anonymous letter prompted an investigation into these contracts by the State Audit Court to which President Reichstul was required to respond. In May 1999, Petrobras issued a Press Notice, indicating that it had decided to intervene in the P36 project as a result of Petromec’s alleged “financial difficulties”. The Release referred expressly to Maritima, which was the name in the market place most associated with Mr Efromovich and the various projects. It made public that Petrobras was taking corrective steps to reduce its alleged risk exposure and Maritima’s monopoly of Petrobras’ contracts. In fact, Petrobras did not intervene in or take over the management of the P36 upgrade, although it did, (as it did in relation to P38 and P40), take over payment to suppliers.

The problems with progress of the Projects continued, and (in relation to P40) were the subject of further complaint by Petrobras in a letter to FCI on 15 September 1999. It is common ground that in the period leading up to April 2000 Petrobras were concerned about the Projects. It is common ground that the fact that Petrobras was concerned and voicing concerns to FCI is relevant factual matrix to the preliminary issues.

FCI contend that the question of who was to blame for any alleged delay, and who is responsible for the same, are not matters for determination at the current trial. The causes of the delays are in issue between the parties.

At this point in the Projects, the process of submission of ITCs, CWEs, CORs and Change Orders proceeded, broadly, in the contractually contemplated fashion, save that Brasoil contends FCI were slow in presenting CWEs and often submitted CWEs in respect of work which they had actually carried out. It is common ground that the fact that FCI were presenting claims for payment in respect of works to Brasoil in the period leading up to April 2000 is relevant factual matrix to the preliminary issues. It is also common ground that, as at April 2000, these claims were being analysed by Petrobras.

The manner in which FCI were presenting such claims and in particular whether FCI were presenting such claims by reference to any contractually agreed change order process or otherwise is not relevant, FCI contend, to the construction of the reservation of “all claims, costs and expenses” used in the Side Letter Agreements (see paragraph (120) below).

Petrobras contends that this is not only relevant, but central to the factual matrix describing as it does what it contends was the accepted course of dealings between the parties in relation to such issues.

In late August 1999, FCI submitted claims to Brasoil/Petrobras for very substantial sums in relation to the P38 and P40 projects. In relation to P40, FCI was claiming a total of US$80,721,877.02 in addition to the fixed contract price. Of this, US$20,746,652.65 related to the mooring system, which was by agreement an addition to the original specification; US$25,155,382.79 was the value attributed by FCI to ITCs issued by Brasoil; and US$34,819,877.02 related to claims. The figure for claims was set out in a document, Claim Revision 01. The total sum claimed in relation to P38 was US$39,110,054.23, of which US$5,949,982.44 was attributed to ITCs/CWEs issued, and the balance of US$33,160,071.80 to claims.

Of the three elements in the total sum claimed at this stage in relation to P40, two were resolved promptly in the autumn of 1999. It was agreed that Brasoil would pay FCI directly the sum of US$12,663,714 in respect of the ITCs listed in Revision 07 of the P40 Contract Change Log issued on 25 August 1999. Secondly, Petrobras/Brasoil agreed to pay FCI directly the sum of US$19 million for addition of the platform anchoring system. The total sum of US$31,663,714 was paid to FCI in two tranches of US$18,953,741.20 on 29 October 1999 and US$12,709,972.80 on 13 December 1999.

FCI deny that any binding agreement was reached on a final price for the extra works approved under Change Orders which had the effect of compromising its rights under the Supervision Agreement or otherwise. FCI contend that these matters are not relevant to the determination of the preliminary issue. FCI further contend that whether or not the parties reached any agreement prior to April 2000 in relation to the claims presented by FCI, and if so what the terms and effect of that agreement was, is not relevant to the construction of the Side Letter Agreements.

As regards the balance, it is Petrobras’ case that these claims were not susceptible of quick resolution. Petrobras say that the information provided by FCI (when the claims were submitted subsequently) was not well presented or technically documented and that the majority seemed to Petrobras’ personnel to relate to work falling within FCI’s pre-existing contractual scope of work or otherwise to lack merit.

As regards the additional sums claimed by FCI in relation to the P38 project, these comprised: (a) ITCs/CWEs issued; and (b) claims by FCI for work which FCI alleged was done on Brasoil’s instructions and which FCI contends fell within Clauses 6 and 8 of the Supervision Agreement. In relation to the ITCs/CWEs issued on P38, no Change Orders had been issued by this stage. It is Petrobras’ case that the CWEs submitted by FCI were not sufficiently documented/presented.

With regard to the claims, both parties’ position with regard to P38 are the same as in relation to P40.

FCI contend that for the purposes of the preliminary issue, it is sufficient that it is recorded that the parties were in dispute in relation to these claims.

By September 1999, there were a number of important suppliers/sub-contractors whose invoices FCI had not paid, and indeed many other suppliers/sub-contractors who had not been paid. Some of these suppliers/sub-contractors contacted Petrobras/Brasoil on the issue. This financial problem became acute during the autumn of 1999, with serious consequences for progress on the Projects, and giving rise to a crisis which required to be resolved if the Projects were ever to be completed. Again, there is a dispute between the parties as to the reason for non-payment by FCI, which is not for determination at this hearing.

It is common ground that the following facts and matters are relevant factual matrix for the purposes of the preliminary issues: - (a) that suppliers, including Jurong had not been paid; and (b) that Brasoil/Petrobras were considering claims against FCI arising out of the non-payment of suppliers.

FCI further say that they were holding Brasoil responsible for the claims FCI had made and for failing to put FCI in funds in time to enable FCI to pay suppliers.

A meeting took place at Petrobras’ offices on 29 September 1999.

It is Petrobras’ case that at this meeting Mr Efromovich indicated to Mr Musa of Petrobras that, although the funds received from the Mitsubishi special purpose companies were sufficient to cover FCI’s short-term liabilities to sub-contractors, FCI’s cash flow forecasts for the months October-December 1999 were such that they were predicting a cash-flow deficit. In other words, the value of FCI’s invoices scheduled to be issued to the Petro Dia companies over the coming months would be less than the total value of invoices which would become payable to sub-contractors: they would not have the funds to pay their suppliers/sub-contractors. It is Petrobras’ case that Mr Efromovich also indicated that FCI had little or no cash reserves. Petrobras says the fact of the meeting and its content are relevant factual matrix.

In or about late September/October 1999 FCI requested that Petrobras/Brasoil pay the US$31,663,714 in respect of the P40 Change Orders (including the platform anchoring system) as soon as possible. FCI said that they would also present a series of claims on P38 and P40 and requested that these be considered without delay.

On 30 September 1999, Mr Reichstul contacted Andersen Consulting (Mr Deffarges) with a view to Andersen Consulting assisting Petrobras. Mr Deffarges recorded that conversation in an email to his partners dated 1 October 1999. By letter dated 8 October 1999 to Mr Reichstul, Andersens pitched for the job, outlining their understanding of the work they were being invited to carry out.

Further information was provided on 14 October 1999 by Maritima/FCI by a fax to Mr Musa of Petrobras, which attached a breakdown of FCI’s cash flow position together with projections of project costs for approximately a year.

It is Petrobras’ case that this information suggested that the ‘cash flow’ status of the Projects was already in deficit and was likely to deteriorate with time.

By this time, US$101,036,000 of the US$130 million fixed lump sum price on P38 and US$285,000,360 of the US$324 million fixed lump sum price on P40 had been paid.

Petrobras’ case is as follows. The flow of funds to FCI was intended to reflect the (physical) progress achieved on the Projects, the milestone payments being matched to the percentage of such progress. However, in practice, FCI were receiving these funds on an accelerated basis, ahead of the physical progress of the Projects. The practice was for the payments to be solicited by FCI and approved by Brasoil for payment from the charged accounts on the basis of reports showing ‘financial’ progress rather than actual physical progress. ‘Financial’ progress was invariably in advance of physical progress, and so effectively funds were being advanced earlier than contractually intended. While this had put FCI in a more favourable position as regards cash-flow than had been intended per the contractual arrangements, it meant that, if the accelerated funds were not applied prudently, the funds available from Petro Dia I/II would be exhausted before the Projects had been completed. In fact, even reported physical progress seems to have been well in advance of actual physical progress, as is illustrated (jumping ahead) by the fact that the last milestone payments were made in Spring 2000, but the units physically were completed only in November 2000.

By letter dated 5 October 1999, FCI wrote to Petrobras claiming reimbursement of costs said to have been incurred as a result of alterations, additions and improvements to the contractual scope of supply requested by Brasoil on the P38 and P40 projects. The claims listed were asserted to a value of US$27,820,280 (P40) and US$29,019,624.30 (P38).

In financial terms, a substantial proportion of these claims related to steelwork.

In addition, on 5 October 1999, FCI wrote to Petro Dia I requesting adjustment of the delivery date for P40 from 8 October 1999 to 8 September 2000, in consideration of listed changes said to have been requested by Brasoil.

In summary, Petrobras say the position in October 1999 was as follows.

A new President and Board of Petrobras had been appointed and inherited the P38 and P40 projects, which had been negotiated and documented by a previous administration. The President was concerned at the concentration of projects under the management of companies associated with Maritima. He had received anonymous complaints concerning Petrobras’ dealings with Maritima and been asked by the Federal Audit Office to report on various contracts involving the Amethyst rigs and P36; and he had approached Andersen Consulting to advise him on various projects including P38 and P40.

There were no cost overruns on either project, but an overall cost overrun of 19% was estimated.

There was a significant difference between (i) the total of the sums remaining to be invoiced in respect of the lump sum prices payable to FCI by FEI for P38 and P40, the agreed additions relating to P38 of a value of some US$2 million and to the electricity generating and platform anchoring systems on P40, and the Change Orders on P40, and (ii) the sums estimated by Petrobras to be required for completion of the Projects.

In relation to the P38 project, the difference was estimated by Petrobras to be US$36,637,000 and in relation to the P40 project, US$87,889,387. Petrobras say that these projections were on the basis of information supplied by FCI. FCI dispute this.

In October 1999 the claims submitted by FCI in relation to P38 amounted to some US$29 million and in relation to P40 some US$27.8 million. These sums fell well short of what was required to complete the Projects.

The strategy suggested by Andersens to Petrobras in October 1999 was to “develop a definitive strategy…. to minimize the cost overruns and recover costs Petrobras is entitled to and stop/modify the current contracting policies and procedures that have created the current situation to minimize the possibility of additional surprises”. This involved a review of each of the contracts presently held between Petrobras and the so called “Maritima companies” with a view to achieving the minimal level of cost overruns and the maximum level of cost recovery possible. (See Andersen’s proposal of 27 October 1999 erroneously dated 29 August 1999).

Also critical to Petrobras at this time was to secure the completion of the P38 and P40 projects and to secure oil production as soon as possible as the South Marlin oil field represented one of Petrobras’ biggest investment projects.

The ‘cash-flow’ problems encountered by FCI were causing major problems with suppliers/sub-contractors. Some suppliers/sub-contractors contacted Petrobras/Brasoil directly about the problems they were encountering with non-payment of overdue invoices by FCI. Non-payment of suppliers was causing problems with regard to the progress of the Projects, and threatened greater problems in the future. It also led to the incurring of additional costs, due to the steps taken by suppliers/sub-contractors to protect their interests, whether by refusal to deliver equipment or provide further services pending payment of the overdue sums (with a consequent disruption of and delay to the projects), or by the charging of interest on overdue sums. The scale of this problem increased substantially in late 1999 and early 2000. Lists were provided by FCI to Petrobras of unpaid vendors, revealing the extent of the problem. The lists provided at the end of November 1999 showed unpaid vendors for P38 and P40 respectively amounting to values of US$22.6 million and US$22.3 million. At a meeting on 25 November 1999 with Mr Musa of Petrobras, FCI emphasised the critical cash flow status of the Projects.

FCI’s case is that the fact that suppliers had not been paid, that there was an anticipated shortfall and that the parties were in discussions, is relevant factual matrix. How this state of affairs arose and who is responsible are not relevant factual matrix and are not for determination at the current trial. FCI do not accept that the above account is accurate or complete.

Petrobras’ case is as follows. This financial position had serious consequences for the completion of the Projects. A number of suppliers/sub-contractors withheld or threatened to withhold equipment, materials and services pending settlement of their overdue invoices, including major suppliers Vickers Ulstein, Bluewater, Wärtsilä, Nuovo Pignone and Hydralift. Inevitably there was going to be delay to the Projects and increase in the costs. Some suppliers/sub-contractors charged interest on outstanding sums, which itself involved substantial sums of money. The problems were serious. The delays in completion were of most significant impact to Petrobras, which was not only paying hire to Petro Dia I/II but losing the possibility of earning oil production revenues pending completion of the units.

Petrobras’ case is as follows. One of the major problems caused in the autumn of 1999 related to the turret mooring system for the P38 unit, supplied by Bluewater pursuant to Purchase Order P38-CO-0002. Bluewater were owed a very substantial sum of money by FCI, on P38, but also on P37, for which they also supplied the turret mooring system. According to Bluewater, it was particularly upset that “monies from P38 were apparently used for other projects resulting in a situation where there may not be sufficient monies left in the charged account to meet FCI’s obligations”, contrary to a written undertaking they had previously been given by FCI to the effect that any payment from the charged account to FCI for the progress of the work sub-contracted to Bluewater would not be used for any purpose other than payment to Bluewater, and payment to Bluewater would follow immediately after FCI had received such payments. This allegation is not accepted by FCI. Bluewater also noted that Mr Efromovich had agreed that Bluewater could seek direct payment from Petrobras, and that Bluewater could withhold services and equipment on P37 and P38 until all relevant payments had been made in full; also that such action might benefit Maritima/FCI’s position towards Petrobras. Bluewater did indeed make such an approach to Petrobras, confirming that Mr Efromovich had assured Bluewater that he agreed to Petrobras making direct payments to Bluewater which could be set off against any payment obligations Petrobras may have had to the Maritima companies. Petrobras says that the above is relevant to the factual matrix.

Petrobras’ case is as follows. Bluewater manufactured the P38 turret mooring system at its manufacturing plant in Abu Dhabi, and shipped it to Singapore at some point around October 1999. Due to non-payment of its overdue invoices, Bluewater diverted the P38 turret to a Malaysian port on its way to Jurong, as part of a general suspension of all remaining works on P37 and P38, and retained it there until the outstanding invoices were paid or a satisfactory solution found.

Petrobras’ case is as follows. Timeous delivery of the turret mooring system was crucial to maintaining the progress schedule of the entire conversion/construction works, and Bluewater’s action threatened to disrupt the planned schedule. Further, the costs incurred as a result of Bluewater’s actions in response to the overdue sums on P37 and P38 were considerable – Bluewater estimated them to be about US$1 million in a letter to the President of Petrobras dated 28 December 1999. A solution was found only in January 2000, by which time the works had been severely affected. By an agreement dated 18 January 2000 Brasoil and FCI undertook to ensure that the monies outstanding under the P38 contract (as identified in Appendix A to the agreement) between Bluewater and FCI would be paid on or before 31 July 2000. The turret mooring system was finally delivered at the Jurong shipyard on 27 January 2000.

After the meeting on 29 September 1999 (paragraphs (66) to (67) above), there was frequent discussion between the parties as to what could be done to prevent the Projects from stalling in view of the significant anticipated shortfall in the remaining funds due to FCI against the projected sums for completion of the Projects. Petrobras also considered internally the options available to them to deal with these problems and to try to ensure that the Projects were completed as quickly as possible. The options initially considered by Petrobras were: (a) the implementation of a tied account system which would enable Petrobras to exercise control over future expenditure of the project funds; (b) cancellation of the contracts and the entering into of direct relations with suppliers/sub-contractors (i.e. the exercising of the rights conferred under the Step-In Agreements); and (c) expedited settlement and negotiation of FCI’s claims. Petrobras considered exercising the ‘step-in’/substitution right, as they were encouraged to do by Bluewater, but did not do so in view of (a) the complications that would arise from doing so at such a stage; (b) the lack of clarity as to whether the situation was one justifying Brasoil’s contractual right to step-in; and (c) adverse experiences of doing so that Petrobras had had on other projects, (where the attempt to exercise such rights had led to disruption to the schedules and to costly litigation).

While the options were under consideration at Petrobras, certain interim measures were taken. One measure taken immediately was the expediting of the payment of the sum of US$31,663,714 agreed in respect of Change Orders on P40, which was paid to FCI in two tranches of US$18,953,741.20 on 29 October 1999 and US$12,709,972.80 on 13 December 1999. The parties agreed that these payments would be used to pay key vendors whose supplies and services were most crucial to the Projects and whose accounts were severely overdue, which vendors were identified in correspondence between the parties.

It is Petrobras’ case that FCI did not in fact use these funds to pay the identified vendors when they were received, and allege that this was done on the instructions of Mr Efromovich.

The problems with suppliers continued, particularly suppliers who had been informed that Maritima/FCI had been provided with the funds to pay them.

FCI’s case is that whether or not the parties reached any agreement prior to April 2000 in relation to the claims presented by FCI, what the terms and effect of any such agreement were, and how any of the monies paid were applied, are not relevant to the construction of the Side Letter Agreements. Further FCI do not accept that the account set out above is an accurate or complete account.

Petrobras contends that such agreements were final and binding on the parties and that the "subject to" language in the Side Letters was not intended and does not entitle FCI to re-open prior agreements. As such, these agreements are relevant to the present proceedings.

According to Petrobras another measure taken was to authorise advance payments in terms of the milestone payments for the Projects which were presented for payment on the basis of progress which was well in advance of the real physical progress of the projects. FCI presented ‘Boletim de Medicao Servicos’ (i.e. progress measurement certificates) to Brasoil which claimed payment on the basis of ‘financial’ progress rather than literal physical progress; Brasoil authorised these even though FCI had not fulfilled the relevant physical milestones.

Petrobras’ case is as follows. Further meetings were held between Petrobras and Maritima/FCI personnel to attempt to find a solution. Maritima/FCI requested Petrobras to find an urgent solution, their own proposal being that Petrobras should pay the claims on P37, P38 and P40 recently submitted, which amounted to some US$121 million, and that thereafter Petrobras/Brasoil and Maritima/FCI should share the costs of completing the projects equally. At this stage, the shortfall in funds on the P38 and P40 projects, according to the information supplied by Maritima/FCI, was US$126.5 million, there remaining only US$30,964,000 to invoice in respect of P38 and US$54,379,000 in respect of P40 by reference to the original lump-sum prices. Taking into account the shortfall on the P37 project, the shortfall by 2 December 1999 was nearly US$160 million. Subsequently, updated claims were presented by FCI for P38. In addition, FCI wrote on 16 December 1999 to Petro Dia II requesting adjustment of the delivery date for the P38 unit to 31 October 2000 (from the original date of 18 December 1999) due to“major project changes” FCI claimed had been requested by Brasoil and due to force majeure events. That the parties were in discussions and that an offer was made by Maritima/FCI (which Petrobras rejected) to resolve the dispute between the parties is accepted and relevant factual matrix.

On 24 November 1999, Andersens wrote to the Petrobras Board in terms of a “constructive intervention approach, a well defined, planned, proactive and focused rescue project” and on 24 November 1999, Petrobras signed a formal engagement letter with Andersens. The Andersen project was formally launched on 15 December 1999, and on 10 January 2000, Andersen’s project scope was expanded to include a review of the P36 contract. In December 1999, the Petrobras Board resolved to send engineers to the Jurong Shipyard to monitor the situation.

By late November 1999, it had been decided by Petrobras that the measure to be adopted would be the implementation of a tied account system. This involved setting up accounts (at Safra National Bank of New York) into which the remaining milestone payments would be paid from the charged account, and out of which payments could be made only where authorised by designated representatives of Brasoil. By this means, Petrobras could ensure that the funds were used to pay the suppliers/sub-contractors on the Projects. Such a system was implemented in December 1999 on the P37 project, which had suffered from similar problems for reassurance of suppliers. The implementation of this system enabled Petrobras to control the payment direct to suppliers of sums within the original lump sum price and sums in respect of Change Orders it had approved as due by Brasoil to FCI.

The trigger for withdrawals from the account would be a new form Completion Certificate evidencing what works had been completed and signed by Brasoil and FCI, rather than the milestones. Payments in respect of Change Orders were also to be paid into the escrow account. Payments from the escrow account were to be made pursuant to a notice in each case from Brasoil and FCI and would be made directly to the sub-contractor who had undertaken work or supplied equipment/materials on the Projects.

This system was approved by the Petrobras Executive Board on 11January 2000, and implemented subsequently. The recommendation to the Board in early January 2000 was for the utilisation of the tied account scheme on P38 and P40 and on 13 January 2000, the Board accepted this recommendation and authorised the creation of escrow accounts from which FCI were to release funds to third party suppliers with Brasoil's consent. However, payments at that time were to be limited to existing contractual balances (i.e. the lump-sums payable under the Full Conversion Contracts) and the resources to be used were the Petro Dia companies’ responsibility, as per the chartering contracts. However, it was recognised by Petrobras at this time that the existing balances would be insufficient to cover all the outstanding commitments and Petrobras forecasted that it would be required to inject its own monies by the end of March 2000. Again, at this time, Petrobras was in the process of analysing the claims from FCI and it was decided that a final reconciliation between the monies it, Petrobras, would have to advance to complete the Projects and the possible sums which Petrobras/Brasoil would have to pay in respect of the claims submitted by the first defendants would be decided in due course.

FCI’s suppliers and sub-contractors were informed that this system was to be implemented. However, given the relatively limited funds which remained for payment (further milestone payments having been made under the existing system in relation to November 1999 and December 1999 and January 2000 in the amounts of US$9,737,000 for P38 and US$22,971,600 for P40) in comparison with the sums estimated to be required in order to complete the Projects, this system by itself could obviously not provide a definitive solution. It is common ground that the fact that there would be a shortfall and further funds required to complete the works notwithstanding the tied account system is relevant factual matrix to the preliminary issues.

Petrobras’ case is as follows. In January 2000, Maritima’s proposed that it would guarantee completion of the works on P38 and P40 (including assumption of responsibility for any increased cost) if Petrobras paid US$100 million towards the claims on P37, P38 and P40 and settled all outstanding claims in relation to P36. This proposal was rejected by Petrobras. At this point, the shortfall of the contractual balance payable in comparison with Petrobras’ estimate of the cost to completion, on the basis of the information provided by FCI, was US$40.6 million for P38 and US$87.9 million for P40, in addition to US$30.8 million for P37. However, this was revised sharply upwards in mid-February, when data was submitted by FCI at Petrobras’ request showing a shortfall of US$55.5 million for P38 and US$144.7 million for P40, in addition to US$37.3 million for P37, thus an overall shortfall over the 3 projects estimated at US$237.54 million. According to a contemporaneous Petrobras Note, the explanation advanced by FCI for the increase in the estimated shortfall was that extra costs had been incurred as a result of the payment problems since October 1999 (when the figure of US$160 million or so had been identified for the estimated shortfall), due to seizure of equipment at the port and the yard in Singapore, the diversion of the turret mooring system and other acts by Bluewater, as well as financial costs.

Further, at this point, it became clear to Petrobras that the disagreements between FCI and Jurong were posing a threat to the progress of the Projects. In an e-mail from Jurong to Maritima, which was copied to Mr Orlando of Petrobras, Jurong set out the requirements, from their perspective, for meeting delivery of P38 by 5June 2000 and P40 on 30 June 2000. The requirements included submission of all remaining drawings by February, immediate furnishing of all outstanding materials, replies to all outstanding technical queries, and immediate attention to all outstanding variation orders. The e-mail stated that, in principle, Jurong would not proceed with the additional works (the subject of their variation order requests) until agreement was reached. By the end of March, the variation order disputes had not been resolved, leading to a lack of co-operation from Jurong, and Jurong was threatening to take action, including stopping work, due to the large sums owing from FCI in relation to outstanding invoices. The problems due to non-payment of other suppliers/sub-contractors also continued, as the sums channelled through the escrow account were not sufficient to bring more than a relatively small proportion of payments up to date.

The remaining milestone payments lasted only until the end of March 2000. It is Petrobras’ case that the final US$13.26 million of funds relating to P38, was paid direct to FCI/Maritima by Petro Dia II, and not into the relevant escrow account and that these funds never came into the project. This is disputed by FCI and FCI say that it is not relevant to the Court’s determination. At this point, the project funds were exhausted, but significant sums of money were still necessary for completion of the Projects. It is common ground that the fact that the original lump sums had been released by April 2000, is relevant factual matrix. However, FCI contend that how the monies were applied is not relevant factual matrix and not for determination at the current trial.

It was obvious at this stage that Petrobras would have to inject substantial further funds, from its own resources, in order to ensure completion of the Projects. While the original fixed lump sum prices under the Conversion Contracts had been paid in full (with the funds advanced by Mitsubishi via the special purpose Petro Dia companies) and Petrobras/Brasoil had paid the sums agreed in respect of Change Orders, it was clear that FCI did not (or would not) have the requisite funds to enable there to be completion of the Projects. At this time FCI’s claims for payment were still being analysed by Petrobras. The adverse financial consequences to Petrobras of the Projects not being completed within the shortest possible timescale would be considerable, and the contractual structure did not provide an obvious means of obtaining any effective compensation for these consequences. It is Petrobras’ case that it was clear to it that, to save the Projects from collapse, Petrobras/Brasoil would have to make direct payments to the various unpaid suppliers/sub-contractors whose invoices FCI could or would not pay, in order to ensure their continued co-operation and the continued supply of their vital equipment, material and services.

It is common ground (a) that it was FCI’s legal responsibility (not Petrobras’s or Brasoil’s) under its contracts with its suppliers/contractors to pay for the services of these suppliers/sub-contractors (FCI not Brasoil were the contacting counter party with suppliers), and (b) that the works required further funds before the same could be completed.

On 1 March 2000, Andersens made a presentation to the Petrobras Board. The presentation records the claims by FCI as at December 1999 in relation to P38 as US$26.2m and US$40.1m in relation to P40. It also makes certain criticisms of the Projects, including the lack of any formal contract management at the outset, the fact that project changes were commenced before any budget was formally approved by Petrobras, and the absence of any re-evaluation by Petrobras of the business case before approving changes to the conversion works.

On 20 March 2000, Mr Menezes, Director of SEGEN proposed to the Petrobras Board that it should approve the injection of further resources through the tied accounts system and should approve negotiations for the substitution of FEI on both the projects.

At a meeting on 30 March 2000, the Petrobras Executive Board resolved that the Engineering Department should issue demands to FCI calling upon them to comply with their contractual obligations under the P38 and P40 projects, specifically in relation to their debts to Jurong and other sub-contractors, and stipulating that all payments should be made within 48 hours of the demand, failing which Petrobras/Brasoil would assume full financial control of the Projects and commence making direct payments to the Maritima companies’ sub-contractors. Should FCI fail to do so, SEGEN was to take the necessary measures in respect of direct payments to suppliers for 2 months. The Board also resolved to create an inter-departmental Task Group to analyse the situation.

It is Petrobras’ case that its concern was to settle the current problems with third party suppliers and Jurong as quickly as possibly in order to avoid any delay in the completion of the conversions, which was costly and would directly affect Petrobras’ production targets.

Pursuant to the Board’s decision on 30 March 2000, a Task Group was set up in early April 2000 to examine the relationships and the contracts between FCI and Jurong and third party suppliers and to facilitate direct payments. Brasoil had express step in rights in relation to the Projects under the Step-In Agreements, dated 17 March 1998 and 11 December 1997. How these step in rights would in fact operate is in dispute between the parties and not for this Court’s determination in this hearing. In any event, Brasoil did not exercise those rights, even though Jurong and other third parties were requesting Petrobras to exercise their step in rights.

On 5 April 2000, Mr Padilla of Maritima/FCI wrote to Mr Musa seeking a solution to the delay in payments to FCI by Petrobras/Brasoil in relation to both P38 and P40.

Letters as envisaged by the Board Resolution of 30 March 2000 were sent to FCI, on 14 April 2000 and again on 18 April 2000. The letters noted that it had come to Brasoil’s attention that suppliers of goods and services within FCI’s scope of supply were owed significant sums of money in relation to critical goods and services on the P38 and P40 projects, and requested that FCI make immediate payment of all sums identified in the attached schedules and any further outstanding sums. The letters required that evidence of such payment be provided within 48 hours, and reserved the right to pursue claims for costs/losses incurred arising from FCI’s failure to comply with their contractual obligations and, in particular, noted that Brasoil would seek to recover in full from FCI any payments which Brasoil might become obliged to make in order to ensure the timely completion of the conversion works or which were necessary to ensure FCI’s compliance with their contractual obligations to Brasoil and third parties.

FCI’s formal response to these letters was made (some time later) on 17 May 2000. In their response, FCI/FEI disputed the matters alleged in Brasoil’s letters and formally sought their withdrawal. However, FCI did not object to Petrobras’ assumption of financial control over the Projects.

It is Petrobras’ case that the provision of financial resources of US$22.9 million (for P38) and US$69.8 million (for P40) was approved by Petrobras for direct payments to suppliers/sub-contractors, to cover estimated disbursements for an 8-week period.

At this point, where Petrobras had decided to assume financial control of the Projects and to make the requisite payments to suppliers/sub-contractors directly itself, an appropriate system for doing so had to be evolved. It is Petrobras’ case that the tied account system was no longer appropriate, as there was no money left in the Projects to be paid into such an account. It is Petrobras’ case that it therefore sought a system for making direct payments to suppliers which would give it full control over the payment process and would preserve Petrobras/Brasoil’s existing and future rights to recover from FCI any direct payments made to suppliers/sub-contractors at FCI’s request or with their approval. Petrobras also stipulated that placing of further purchase orders must be by common agreement between FCI and Brasoil, but otherwise in line with the existing procurement/contractual procedures.

The system evolved to support and facilitate the direct payments to suppliers/sub-contractors involved the issuing of Side Letter Agreements for individual suppliers/sub-contractors, to be signed by Brasoil, FCI and the supplier/sub-contractor in question. FCI and Petrobras/Brasoil received legal advice on the form of the letter. The wording for the Side Letter Agreements to be issued was agreed between Petrobras/Brasoil and FCI on 12 April 2000. Subject to minor and immaterial differences, the Side Letter Agreements subsequently issued and in respect of which Brasoil's claims are advanced, all followed this agreed form.

The Side Letter Agreements, in line with the agreed proforma of 12April 2000, each provided:

“In consideration of [supplier] entering into and continuing performance of the [P40/P38] Purchase Order and its request for its security for the payments due from FCI under the Purchase Order, the parties hereto agree that in the event FCI fails to make any payment when due under the Purchase Order, Brasoil confirms an irrevocable commitment upon first written request from [supplier] to make payment directly to [supplier] subject always to aggregate of any and all such payments not exceeding (US$ ).

FCI acknowledge and agree that any payment made by Brasoil hereunder shall as between FCI and Brasoil be regarded as payment by Brasoil to FCI which may be recovered (subject to the settlement and reconciliation of all claims, costs and expenses due to either party which are hereby reserved) by Brasoil from FCI including, by way of deduction from any sums due to FCI from Brasoil under the provisions of the Supervision Agreement.

FCI and [supplier] shall request Brasoil to countersign this Side Letter confirming agreement to the contents hereof. This letter is not to be used as a guarantee to any other parties besides the undersigned and will be governed by the law and jurisdiction provisions of the Supervision Agreement.”

Once the terms of the pro forma Side Letter Agreement were agreed, the Petrobras Board then approved further payments to be made directly to third party suppliers. Further, the Task Group set up in accordance with Andersen’s recommendations continued to evaluate the progress of the works in Singapore and the costs to be incurred up to the conclusion of the Projects. As at June 2000, the Task Group estimated that in relation to P40, the additional costs required to conclude the works (as against the original fixed price) would be in the region of US$143.6m, and in relation to P38, US$73.8m.

After the move to a system of direct payment of suppliers/sub-contractors under the Side Letter Agreements had been identified as the intended course, it is Petrobras’ case that Petrobras set up a system to collate as much information as possible relevant to the payments that would have to be made to such suppliers/sub-contractors. It is Petrobras’ case that this was done through the Task Group whose formation had been ordered by the Petrobras Executive Board on 30 March 2000, and involved the obtaining of information from three sources, namely: (a) the information already acquired by Petrobras, for example in the context of the escrow account arrangements; (b) FCI, from whom Petrobras requested copies of contracts/purchase orders placed with suppliers/sub-contractors and related documentation/information such as invoices; and (c) Brasoil wrote directly to the suppliers/sub-contractors requesting them to provide information. Brasoil also wrote directly to suppliers/sub-contractors to inform them that new invoices should be made out to Brasoil in respect of invoices previously issued to FCI and outstanding for payment; as to new invoices, these were simply addressed to Brasoil.

It is Petrobras’ case that the process which led to payment under the Side Letter Agreements included:

FCI accept that a system was introduced but do not accept that it was used in respect of all payments. FCI deny that the system was intended to commit or give rise to any obligation on the part of FCI to pay such amounts to Brasoil. There is an issue between the parties, which is not for determination now, as to whether any demands were made by third party suppliers on Brasoil for payment pursuant to the Side Letter Agreements. Brasoil, funded by Petrobras, was controlling its payment for goods and services provided by the third party suppliers against invoices rendered to Brasoil for payment. Those invoices had originally been issued to FCI and were subsequently re-issued to Brasoil after inception of the Side Letter mechanism. Petrobras’ case is that the reason for this was that Brasoil's internal regulations prohibit it from paying invoices not addressed to it. It is common ground that Petrobras put Brasoil in funds to make the payments.

An important element in the procedure was the issuance of a “Request for Payment” form by FCI. There are three versions of the FCI ‘Request for Payment’ document. Originally, these documents were internal FCI documents used to authorise payments to their suppliers, and were signed only by FCI personnel. These were often sent by FCI as part of the information in relation to a particular supplier in response to the information gathering procedure described above. Subsequent to the adoption of financial control by Petrobras, the form was adapted to provide for signature by Mr Orlando on behalf of Brasoil. In either case, Andersen Consulting would stamp the Request for Payment to approve it for payment. A further amendment led to the inclusion in some Requests for Payment (at least originally contemplated for use where the sum owed to a particular supplier/sub-contractor exceeded the limit set out in the relevant Side Letter Agreement) of a rubric in the following terms: -

“FCI acknowledge and agree that any payment made by BRASOIL in accordance with this REQUEST FOR PAYMENT hereunder shall as between FCI and BRASOIL be regarded as payment by BRASOIL to FCI which may be recovered (subject to the settlement and reconciliation of all claims, costs and expenses due to either party which are hereby reserved) by BRASOIL from FCI including, by way of deduction from any sums due to FCI from BRASOIL under the provisions of the Supervision Agreement.”

In addition, Petrobras stipulated that Brasoil’s written approval to a purchase order or contract entered into with a supplier/sub-contractor did not give rise to and was not to be deemed as constituting any obligation on Brasoil’s part to make payment under such purchase orders save to the extent that it included wording set out in a letter of 30 May 2000 which adapted the wording of the Side Letter Agreements to the purchase order/contract context.

A specific procedure was put in place for Brasoil’s direct payment of consultants, which included elements and/or employees of the Maritima group.

According to Petrobras substantial progress had been made in the process of collating information and issuing side letters by mid-May 2000.

According to Petrobras the funds initially authorised by the Petrobras Executive Board for payment to suppliers/sub-contractors had been designed by Petrobras to cover an 8 week period. By 31 May 2000, SEGEN/EMPMAR estimated that the hitherto authorised resources would be exhausted in no more than 3 weeks.

According to Petrobras on 15 June 2000, Petrobras’ director Mr Menezes submitted an executive summary of a proposal to Petrobras’ Executive Board for approval of a further advance of financial resources for direct payment to suppliers and sub-contractors in relation to the P38 and P40 conversion works in the sums of US$37.7 million and US$73.8 million respectively. This was followed on 19 June 2000 by a Report from the inter-departmental Task Group set up on 18 April 2000 which identified these as the sums required to cover the next 7 months (at which time the report stated that the units should be at their final location and ready to commence oil production) and made a proposal for the provision of such financial resources. On 21 June 2000, sums were authorised by the Executive Board, as requested, for the continuation of direct payments to suppliers.

This system remained in place until the completion of the Projects. The pattern of payments to suppliers/sub-contractors was affected by periodic requests from FCI to prioritise payment to suppliers withholding critical equipment for non-payment.

On 30 June 2000, FCI presented letters on each of P38 and P40 further to their previous ‘Contract Additional Costs Reimbursement Requests’ sent on 5 October 1999, presenting further claims as well as revisions of some of the claims previously submitted. The sums now claimed were, for P38, US$26,299,714.20 for the claims previously submitted (as revised), and US$22,250,391.56 for the newly submitted claims, and, for P40, US$70,042,319 for all claims.

It is Petrobras’ case that these, like the previous claims submitted, were poorly presented and not properly substantiated.

Letters were sent by Curtis Davis Garrard, FCI’s solicitors, to Petrobras and Brasoil by fax on 8 August 2000 formally presenting their clients’ claims and seeking proposals from Petrobras/Brasoil regarding settlement of their clients’ claims on P38 and P40.

In these letters, Curtis Davis Garrard claimed that the increased costs of the conversion works to enable alterations and changes to be made pursuant to FCI’s instructions and for which they alleged Petrobras/Brasoil were obliged to pay FCI pursuant to clause 6.4 of the Supervision Agreement were, for P38, US$55,657,599 and, for P40, US$74,072,099. These were broken down into claims, Change Order Requests awaiting approval, and Change Order Requests said to be ‘in preparation’ – significantly, for P38 the claims constituted US$48,550,105 of the total of US$55,657,599, and for P40, the claims constituted US$70,042,319 of the US$74,072,099, with Change Order Requests in preparation identified as US$3,547,010.

In addition, the letters asserted that FCI held Petrobras/Brasoil responsible for delays, costs and expenses claimed to arise from interference by Petrobras in relationships between FCI and their suppliers/sub-contractors and various other matters, on the basis that Petrobras/Brasoil had failed in exercising their supervisory and approval rights under the Supervision Agreement to act in accordance with good industry practice.

It is Petrobras’ case that this was the first time that these claims had ever been suggested by or on behalf of FCI.

On 23 August 2000 Clifford Chance wrote to Curtis Davis Garrard informing CDG that they were taking their clients instructions on CDG’s 8 August claims letter. This was then followed on 6 September 2000 by a letter from Brasoil to FCI, drafted by Clifford Chance, requesting FCI to review their conduct.

Jurong Shipyard was the shipyard where the units were based for the majority of the conversion/construction works. Jurong carried out most of the major structural work on the units (especially steelwork). An agreement, the Jurong Settlement Agreement, was signed by Brasoil, FCI and Jurong on 14 November 2000.

Jurong were sub-contracted to carry out the major part of the conversion works, which entailed mainly structural work and also the installation of the equipment and materials supplied by other third party suppliers.

FCI contend that Jurong and the sub-contracts with Jurong (other than commercial terms/price) were approved by Petrobras/Brasoil.

Petrobras agree that Jurong will have been approved by them but have been unable to confirm whether or not the sub-contacts will have been approved by them.

Jurong made many claims against FCI for further payments in addition to the lump sum prices agreed with it at the outset. The need to pay outstanding sums due in respect of the original lump sum prices, agreed variations, and to settle unresolved variation claims by Jurong fully and finally in order to procure the release of P38 and P40 from Jurong’s shipyard in Singapore so that Petrobras could move the units to Brazil and put them into operation, was the context for the Jurong Settlement Agreement.

It is FCI’s case that the cause of the claims by Jurong, their merits as against FCI and who as between FCI and Brasoil should bear responsibility ultimately for them are not relevant factual matrix to the preliminary issues and that such matters are not for determination at the current trial.

Petrobras say that, in view of the items identified in the Jurong Settlement Agreement as contributing to the sum payable to Jurong, the fact that FCI had not paid a substantial part of the original lump sum prices under the sub-contracts with Jurong is relevant factual matrix. Petrobras also say in relation to the sums payable in respect of the agreed amendments and the unresolved variation orders, that it is relevant factual matrix that the subject of these may have fallen within the original scope of FCI’s responsibility, but not within Jurong’s scope of work under the sub-contracts as unamended. Petrobras also contend that it is relevant factual matrix that some of the sums payable under the agreed amendments can, as Petrobras asserts, be seen to fall within FCI’s original scope of work. However, Petrobras accepts that the issue as what part of the work the subject of the agreed amendments and of Jurong’s unresolved variation orders falls within this category, is not for determination at the current trial. Petrobras also contend that the history of the relationship between FCI and Jurong as set out below is relevant as part of the problems with suppliers which Petrobras say demonstrated FCI’s mismanagement of the Projects. While the issue whether there was mismanagement is not for determination at the current trial, the parties’ mutual awareness that there were problems of this nature and therefore that such mismanagement at least might be a cause of the shortfall is relevant factual matrix.

FCI entered into contracts with Jurong Shipyard Ltd in respect of P40 on 17 January 1998 and in respect of P38 on 18 April 1998. Petrobras’ account of these arrangements is set out in paragraphs (147) to (156) below.

Under these agreements, which were in materially similar terms, Jurong undertook by clause 2.1 and 2.2 to execute, complete and maintain the Services as defined in Appendix I. The Services were identified in outline in tabular form in Appendix I to the agreement, which identified tasks required for the conversion project and allocated them between FCI and Jurong. Further definition of the scope of Services was set out in Appendix 6, including as to the scope of steelwork included for the fixed lump sum price. The Services were to be performed in compliance with specified documentation from the Main Contract (identified as being between FCI and Brasoil) including the CD-ROM copy of the Specification except where identified as excluded (Appendices 1 and 7).

Petrobras say that the CD Rom containing the Specification which is referred to at Appendices 1 and 7 to the sub-contracts includes a draft contract which is between Brasoil and a Contractor undertaking responsibility for the project. This contains the Annexes referred to in Appendices 1, 2, 6 and 7 of the sub-contracts, as well as other elements of the Specification as identified in those Appendices. The content of the documentation in the CD Rom reflects the draft documentation prepared by Brasoil for the purposes of the tender process and which will therefore have been drafted without reference to the particular type of structure which was used in the event for these particular transactions. It is unclear why there is a reference to a ‘Main Contract’ specifically between FCI and Brasoil, although clearly this would most closely match the form of transactional structure envisaged by the CD Rom documents. Petrobras say that the Supervision Agreements included obligations between FCI and Brasoil dealing with broadly similar subject matter to some of those which are referred to in the sub-contract, in particular in relation to variations to the original specification.

For P38 the schedule, which provided, inter alia, for towage of the P38 vessel to the Campos Basin from 17 July 1999 to 19 September 1999 and the completion of off-shore installation and commissioning by 18 December 1999 was set out in paragraph 2.0 of Appendix 6.

Jurong were to assume and perform all the duties, responsibilities, obligations and liabilities of FCI under the contract between Brasoil and FCI, of the provisions of which it was deemed to have full knowledge, and to have the same rights against FCI as FCI had against Brasoil (by clause 3.1, 3.2 and 3.5 and see also recitals 3 and 4).

Jurong were to comply with all instructions and decisions of Brasoil which were notified and confirmed to it in writing by FCI irrespective of whether such instructions and decisions were validly given under the contract between FCI and Brasoil, and to have the same corollary rights in respect of such compliance as FCI had against Brasoil (by clause 3.9). FCI had the same powers to give instructions and decisions as Brasoil had in relation to the Work to be performed by FCI under the contract with Brasoil, and Jurong the like obligations to comply therewith and the like rights in relation thereto as FCI had against Brasoil under their contract (clause 3.10).

Instructions could be issued by Brasoil to FCI pursuant to clause 6 of the Supervision Agreement which involved a change, in respect of which clause 6 provides for additional remuneration to be payable by Brasoil to FCI. Such instructions could result in the performance of work by Jurong which was additional to Jurong’s original scope of work and for which Jurong was entitled to additional remuneration.

Jurong were to make such variations of the Services whether by addition, modification or omission as might be ordered by Brasoil and confirmed in writing by FCI, or agreed between Brasoil and FCI and confirmed in writing to Jurong by FCI, or ordered in writing by FCI (clause 3.11); such variations were to be valued as set out in Clause 3.12/Appendix 2.

Jurong were (by clause 5.1) to receive payment as set out in Appendix 2, which provided for a Fixed Lump Sum Price of US$24,500,000 for P38 and US$38,500,000 for P40 which was deemed to be a fully inclusive sum for the contracted services and included, inter alia, weather downtime. FCI would not accept any claim for additional remuneration on grounds of Jurong’s failure to price an item of work identifiable from Appendix 1 (Appendix 2, paragraph 1.0). There was also a formula for ascertaining the rate for authorised variations. Jurong warranted that such rates and prices were sufficient to support the performance of all its obligations under the agreement or otherwise appropriate for the proper and timely performance of the Services Paras. 1.0 and 4.0 to 7.0 of Appendix 2; and Clause 3.12. Further Appendix 2, paragraph 9 provided that payment to Jurong should be made 45 days from receipt of an approved invoice from Brasoil.

As to P40 Amendments, on 26 March 1999 an Amendment was signed to the P40 Contract between FCI and Jurong, whereby FCI agreed to pay an additional lump sum of US$1,550,000 for the execution and completion of total repair/renewal steelwork up to a weight of 1,100 tons, with Jurong waiving its right to claim under Appendix 2, Clause 8.3 of the Contract. A Second Amendment was entered into on 20 April 1999 whereby FCI agreed to pay Jurong US$10,350,000 for the execution and completion of stipulated work (including installation of the riser deck, excluding structural and outfittings steel work, fabrication and erection of piping on the riser deck, cable installation of the riser deck, blasting and painting of P40 areas as per Brasoil’s Specification. A Third Amendment was entered into on 8 June 2000, whereby FCI agreed to pay an additional lump sum of US$8,014,987 for the execution of work as per the attached list of ‘Variation Orders Agreed with JSL [i.e. Jurong]’, and a Fourth Amendment on 2 October 2000 for payment of US$210,549 for execution of identified additional work.

As to P38 Amendments, the amendments to the P38 sub-contract between FCI and Jurong consisted of a First Amendment dated 27 March 2000 whereby FCI agreed to pay US$5,108,012 for additional steelwork of some 1,977.55 tons over the 1,850 tons agreed to be in the contract, a Second Amendment dated 22 June 2000 whereby FCI agreed to pay US$9,374,507.73 for the execution of additional work regarding repair steel, and a Third Amendment dated 2 October 2000 for payment of US$2,103,313.63 for execution of identified additional work.

FCI contend that the matters set out in paragraphs (147) to (156) above are not relevant to the preliminary issues. FCI say that they should not be taken to accept the account in these paragraphs, save where indicated.

Petrobras says that by the summer of 1999, there were substantial disagreements between FCI and Jurong in relation to responsibility for the inadequate progress on the Projects. Jurong complained that the quantity of steelwork they were being asked to do greatly exceeded that stipulated in the contracts, and were submitting substantial numbers of variation order requests. Jurong contacted Petrobras to express its concerns at the lack of co-operation it felt it was getting from FCI, in particular in relation to settling the contract variation.

Petrobras says that Jurong continued to submit variation orders through 1999 and into 2000. By March 2000, Jurong were asserting that there were US$14 million worth of variation orders outstanding on P40. FCI responded to Jurong on 25 February 2000 asserting that many of the variation orders issued by Jurong related to matters within their contractual scope. Jurong disputed this in a fax of 29 February 2000. In March 2000 FCI responded to a fair number of Jurong’s VOs, which response appears to have been unsatisfactory to Jurong, who complained to Petrobras about the lack of progress on this issue. Although agreement was reached in terms of the First Amendment to the P38 sub-contract on 27 March 2000, with FCI agreeing to pay Jurong US$5,108,012 for the execution and completion of additional steelwork, and other such Amendments reflecting periodic agreements on variation order requests issued by Jurong, these disputes continued through the year 2000.

Petrobras says that, in addition, Jurong started to express concern about FCI’s failure to pay them the sums due under the sub-contracts (as amended). Jurong were chasing FCI periodically for payment of substantial sums in respect of overdue invoices. Jurong threatened to take action including stopping their work if the position was not resolved.

Petrobras say that the financial situation on the Projects under the sub-contracts was summarised by Jurong in an e-mail to 30 March 2000: on the P38 sub-contract, the original contract price had been US$24.5 million, of which FCI had paid only US$9,392,864; there had also been a contract amendment with a value of US$5 million, which remained unpaid; variation orders to a value of about US$2 million had been approved, of which FCI had paid US$1,874,000. Jurong noted that variation orders issued but not approved amounted to a further US$16.3 million, and forecast variation orders to be issued to a value of some US$15.5 million. As to the P40 sub-contract, the original contract price had been US$38.5 million, of which FCI had paid only US$15,506,049; Contract Amendments amounted to a value of roughly US$10 million, which remained unpaid; approved variation orders amounted to some US$3 million, of which FCI had paid US$2.1 million; Jurong valued variation orders that had been issued but not approved at approximately US$14 million, and forecast variation orders to be issued to be some US$18 million. Thus Petrobras say that FCI had paid only a relatively small proportion of the sums then due to Jurong, with further very substantial sums owing under the original lump-sum agreements and threatened by way of variation orders.

Petrobras’ case is that a further subject of disagreement between FCI and Jurong was the issue of responsibility for delays. Jurong attributed responsibility for delays to FCI’s failure to submit drawings and materials on time and to answer technical queries promptly. FCI complained to Jurong about Jurong’s progress.

Petrobras’ case is that it became apparent to Petrobras that, as with other suppliers/sub-contractors, FCI’s apparently weak financial situation meant that Petrobras would be required to provide the funds to settle FCI’s outstanding debts to Jurong in order to secure the completion and delivery of the units. One consequence of this was that, after some discussion, Jurong entered into Side Letter Agreements with Brasoil and FCI on 6 and 7 July 2000, in similar terms to the Side Letter Agreements with other suppliers/sub-contractors as set out above.

Petrobras says that it commenced the procedure of conducting its own analysis of Jurong’s variation orders issued to FCI. This exercise was expanded around the end of September 2000, when members of the Task Group set up in April 2000 travelled to Jurong for the purpose. This process continued through October 2000, and was a process which (say Petrobras) took place with FCI’s full knowledge and consent. The Task Group produced a report on the results of their analysis on 31 October 2000.

Petrobras say that during the summer and into the autumn of 2000, Jurong continued to raise variation orders, and there continued to be disputes between FCI and Jurong in relation to these. FCI passed the variation order requests on to Petrobras, requesting that corresponding Change Orders be issued by Brasoil. FCI did this regardless of whether or not they were variations requiring the issue of a Change Order under the Specification effective between FCI and Brasoil. Petrobras contend that, the specifications applicable under the Jurong sub-contracts were not back-to-back with the specifications attached to the Bareboat Charter and Purchase Agreements, and FCI’s initial sub-contracts with Jurong did not make provision for all of the work that would be required, FCI having underestimated the extent of the work that would be necessary (in particular, the steelwork). Jurong indicated to Petrobras that they required that all variation orders be settled and payments received before the units’ departure. They also threatened that, if FCI continued to take the line they were taking in relation to the content of variation order requests, they would imminently stop work on the Projects while their engineering personnel worked on producing the documentation stipulated by FCI.

Petrobras’ case is that due to a lack of co-operation during September 2000, at which point it appears that certain key personnel from FCI/Maritima who were employed on the Projects on a ‘consultancy’ basis effectively obstructed further progress on the works in order to force Petrobras to issue Side Letter Agreements to them, Petrobras approached Jurong to deal with Jurong directly in relation to Jurong’s variation orders against FCI. However, FCI warned Jurong not to enter into direct discussions with Petrobras/Brasoil and threatened them with legal proceedings if they did so.

By early September 2000, both units were getting close to completion. In anticipation of completion of the P40 unit, the heavy lift vessel ‘MIGHTY SERVANT’ had been chartered to carry the P40 unit from Singapore to Brazilian waters, and was only available for a narrow time window. This meant that it was extremely urgent that Jurong’s claims against FCI under the shipyard sub-contracts be settled to enable the unit to be released at the appropriate time, as the consequences of the delay should the window be missed would have been enormous. Jurong were continuing to submit variation orders. Negotiations between Petrobras and Jurong, with the knowledge of and with reference to FCI, took place in October and into November 2000 to attempt to find a satisfactory solution.

In contrast, the dispute as to responsibility between Brasoil and FCI for the sums claimed by Jurong from FCI under the sub-contracts continued. On 28 September 2000, FCI wrote to Brasoil repeating their contention that the difficulties had been caused by Brasoil’s failure to adhere to funding arrangements that it had put in place and that the consequences of any delay were for Brasoil’s account.

On 1 November 2000, Jurong (by then known as SembCorp) wrote letters to FCI advising that the work on both units had been completed and that they would be ready for delivery on 7 November 2000 (P40) and 8 November (P38). The letters gave notice that, unless and until all outstanding amounts were fully paid and all variation orders fully settled and paid, Jurong would not release the units.

The sums outstanding to Jurong were considerable, including parts of the original contract sums as well as sums payable pursuant to the various amendments and in relation to agreed or submitted variation orders.

Following negotiation between Petrobras, FCI and Jurong, the Jurong Settlement Agreement was entered into on 14 November 2000. The agreement set out in Clause 1 the Agreed Costs of the conversion works and what were termed the Additional Works, for both P38 and P40, identified the amounts paid, and therefore the balance due to Jurong under its sub-contracts. The amount due (‘the Settlement Sum’) was a global sum of US$82,566,780.78, as to which US$46,428,905.53 related to P40 and US$36,137,875.25 to P38, as well as the Retention amounts payable under the sub-contracts, and third party reimbursable costs. The sums paid to that date by FCI recorded in Clause 1 amounted to less than the original contract values.

The Jurong Settlement Agreement further provided, inter alia:

Brasoil’s claims in these proceedings are brought under the Side Letter Agreements. For the avoidance of doubt this extends to sums paid to third party suppliers including to Jurong. In addition, where there is no Side Letter Agreement or the Side Letter Agreement was for a lesser amount than was paid, Brasoil also claims in restitution and on related bases.

It is common ground that for the purposes of determining these preliminary issues the defences of set-off, abatement and circuity of action referred to in paragraph 5 of the List of Issues are otherwise available to FCI.

The preliminary issues to be determined at this trial are set out in the Order of Moore Bick J of 18 March 2003 as amended on 5 May 2005: -

I amended the preliminary issues on 5 May 2005 because it did not seem sensible or appropriate to consider part of the Side Letter Agreements without at the same time considering the other part.

For the purposes of the (unamended) preliminary issue, Curtis Davis Garrard’s (CDG) letter of 31 October 2003 identifies the types of cross claims encompassed in the Defences. This letter and Clifford Chance’s letter in reply of 10 November 2003 were written to assist the Court and in accordance with an Order of the Court dated 23 October 2003.

CDG’s letter of 31 October 2003 (so far as material) stated as follows: -

“We refer to the hearing on 23 October 2003 and are writing to set out in ‘layman’s’ terms, the types of cross-claim encompassed by our Heads of Defence in the actions, for the assistance of the Court and the parties in relation to the trial of preliminary issues. As was made clear at the hearing on 23 October 2003, this description of the cross-claims does not restrict or supersede our pleadings, and shall not itself be treated as a pleading or otherwise affect the defendant’s entitlement to raise or further particularise their counterclaims after trial of the preliminary issue.

It seems to us that there are a number of levels at which any “categorisation” of the defences and cross-claims could operate, and that there will be an inevitable degree of overlap between some of the categories set out in any categorisation. We have attempted to summarise and categorise the types of defences and cross-claims that the Court will need to have in mind at the January hearing as best we can at present under the three headings set out below. For ease of reference we have given references to the pleadings in the P40 action by way of example.

Issues specific to the claims

Do the Side Letter Agreements (or, where relevant, requests for payment) and/or the Jurong Settlement prevent the defendants from alleging that they are not liable to the claimants for any sums in respect of which the defendants contend they were not in fact indebted to the third party supplier, either at all or in the amount claimed, on the ground that on their true construction the defendants expressly or impliedly acknowledged that they were so indebted? (See paragraph 17(2) of the Reply in P40). This matter involves consideration of the factual matrix of and/or commercial purpose behind the original contractual structure including the risks and costs of conversion (see paragraphs 12 to 17 of the Heads of Defence and Counterclaim in P40).

Cross-claims

1.

Claims for monies allegedly payable to Jurong (either sums paid by the defendants or sums paid by the claimants for which the defendants contend they are not liable).

2.

Claims for monies allegedly payable to other third party suppliers (either sums paid by the defendants or sums paid by the claimants for which the defendants contend they are not liable).

3.

Claims for delay arising out of:

(1)

allegations that the claimants failed to deal promptly/properly with claims submitted by the defendants and/or failed to operate the contractual mechanism for resolving disputes as to such claims (see P40 cross claim 1).

(2)

allegations that the claimants delayed/failed in responding to and/or taking reasonable steps to negotiate contractor work estimates issued to contractors by the claimants (see P40 cross claim 2).

(3)

allegations that the claimants made an excessive number of substantial modifications and changes in the work scope, by issuing instructions to contractors or otherwise (see p40 cross claim 3).

4.

Claims based on allegations that the claimants contacted third party suppliers directly (see P40 cross claim 4).

5.

Claims for the cost of extended term for works (see P40 cross claim 30).

6.

Claims for agency fees, port dues, crew expenses etc. paid by Jurong or Barwil and reimbursed by the defendants but for which Brasoil are responsible (see P40 cross claim 31).

7.

Duplicate/additional testing requirement claims (see P40 cross claims 24 to 26). Although, in the alternative, this could be categorised as falling within the claims for monies payable categories set out above.

8.

Claims for mitigation costs incurred in order to avoid additional delays as a result of the claimant’s changes. (See P40 cross claim 32). Again, this could be included in the claims for monies payable categories.

Types of costs/loss and damage alleged to be recoverable:

The following types of costs or damages are claimed to have been incurred as a result of the above. These are not free standing cross claims as such but are dependent on proving the above claims, and can be used to categorise the cross claims on an alternative/additional basis:

a)

overhead expenses

b)

loss of profit

c)

manpower

d)

support costs

e)

installation costs

f)

facilities and logistics costs

g)

materials

h)

engineering costs. ”

The preliminary issues involve the determination of the following (non-exhaustive) list of sub-issues (as agreed between Counsel):

It is common ground that, for the purposes of determining the preliminary issues, the defences of set-off, abatement and circuity of action referred to in paragraph 5 of the List of Issues are otherwise available to FCI.

Henri Philippe Reichstul

On joining Petrobras, it was part of Mr Reichstul’s role as President of the Board to identify and appoint suitable directors to the new Board. It took him a month or two to make the necessary appointments and organise the upper management structure of the company.

Engineer Eduardo Costa Vaz Musa

The relevant senior members of the P38/P40 team whom Mr Musa supervised included Engineer Jose Orlando Melo de Azevedo, who was the P38 and P40 Project Manager; Engineer Marcio Ferreira Alencar, who became the P38 and P40 Engineering and Procurement Manager during 1999; and Engineer Altamiro da Motta Ferreira Filho, who was the P38 and P40 Construction Manager. Mr Musa and his management team supervised a large team of Petrobras engineers, technical and administrative personnel.

Mr Musa’s counterpart within the FCI organisations was Mr Alberto Padilla. Mr Padilla was also a Director of Maritima.

Engineer Jose Orlando Melo de Azevedo

Mr Orlando was appointed Project Manager for the P40 project towards the end of 1997 and for the P38 project during the first quarter of 1998. To begin with he reported directly to Engineer Orzechowski and from around mid-1999 to Engineer Musa, who replaced Engineer Orzechowski as the South Marlin Field Manager.

Engineer Marcio Ferreira Alencar

German Efromovich

Mr Efromovich’s witness statement contained sections dealing with the relationship with Petrobras, the P40 and P38 projects, the change of the Petrobras Board, discussions over the form of Side Letters and the nature and extent of the disputes between the claimants and the defendants.

Statements on behalf of the defendants were admitted under the Civil Evidence Act 1995/CPR 33.2 from Luiz Eduardo Guimaraes Carneiro, Rui Berford Dias and Antonio Luiz Silva de Menezes.

First, some of the witness statements contained matters outside the knowledge of the particular witness. Mr Reichstul’s first witness statement contained an account of certain matters which were outside Mr Reichstul’s knowledge.

Secondly, the witness statements on both sides contained evidence that was inadmissible in relation to the preliminary issues and in particular in relation to issues of construction. I refer to the relevant legal principles set out below.

Thirdly, the best guide to any disputed matter relevant to the preliminary issues is probably found in the contemporary documents.

Fourthly, it is not appropriate (or possible) to attempt to form any view at this stage as to the merits of the respective cases as to the underlying disputes.

Fifthly, for the reasons set out above the oral evidence was of limited value for the purposes of the preliminary issues.

Petrobras/Brasoil’s case is that:

FCI’s case is that the form of the Side Letter was intended merely to:

Accordingly, FCI contends that it was intended that there should be a negotiation, failing which a determination (by arbitration or otherwise) of, “all claims, costs and expenses due to either party”, such that a final account would be arrived at by way of settlement and reconciliation to establish what net sum was due and to whom.

Mr Efromovich of FCI was not asked to assume any obligation under the Side Letter Agreements. There were no discussions along those lines of any kind in April 2000 or at any other time. In particular, FCI was not told in April 2000 nor was there any discussion to the effect that what was intended by the Side Letter Agreements was that FCI would be liable to Brasoil, on payment to a third party supplier, for the amount paid, together with interest thereon from the date of such payment, which is now the claimants’ position. Both sides wanted to reserve their respective positions for the future.

Further, Petrobras (Mr Reichstul and Mr Musa) appreciated that Mr Efromovich was not willing to make any concession and was not settling anything. Mr Efromovich had the upper hand and they needed FCI’s continuing support to get the conversions finished without delay and into production. Petrobras did not tell Mr Efromovich that FCI’s claims were without merit. On the contrary, they were in the process of being analysed by Petrobras and Mr Musa admitted that something was due to FCI. However, Petrobras was not going to pay anything other than what was essential to FCI until the financial position on all the projects had been determined by Andersen Consulting. This financial analysis by Andersen Consulting had only just begun in April 2000.

As at April 2000, from Mr Efromovich’s viewpoint, he was in dispute with Petrobras on P36, P37, P38 and P40 and believed he was owed substantial amounts of monies (in excess of US$100m). Mr Reichstul treated all the projects as coming under one Maritima umbrella and he was not minded to arrive at any settlement on P38 and P40 in April 2000.

Further, the commercial rationale from Mr Efromovich’s perspective of the two conversions was that:

Thus Mr Efromovich, quite reasonably, took the view that Petrobras/Brasoil were responsible for all costs and expenses incurred outside the original works (for which FCI was to receive a the fixed price), such that (as he accepted), on a final account Brasoil would get credit for any sums paid to suppliers which were payment for original works for which FCI was to receive the fixed price. In other words, FCI would not recover twice for original works.

FCI contend that the factual matrix comprises the following:

The relevant legal principles are found in the following authorities.

In Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912H-913E Lord Hoffman summarised the principles by which contractual documents are construed as follows:

“‘(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)

The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)

The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.

(5)

The “rule” that words should be given their “natural and ordinary meaning” reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. … .”

In relation to principle (2) Lord Hoffman confirmed, in BCCI v Ali, [2002] 1 AC 251, 269[39], that

“When … I said that the admissible background included “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant.

I was merely saying that there is no conceptual limit to what can be regarded as background. It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken. But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: “we do not easily accept that people have made linguistic mistakes, particularly in formal documents”. I was certainly not encouraging a trawl through “background” which could not have made a reasonable person think that the parties must have departed from conventional usage”.

In BCCI v Ali [2002] 1 AC 251, 259[8] Lord Bingham said: -

“In construing … any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties’ intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified.”

In The ‘Tychy’ [2001] 2 Lloyd’s Rep 403, 409[29]. Lord Phillips MR said: -

“Before taking extrinsic evidence into account, it is important to consider precisely why it is said to assist in deciding the meaning of what was subsequently agreed and to consider whether its relevance is sufficiently cogent to the determination of the joint intention of the parties to have regard to it.’ It is also important, though not always easy, to identify what is extrinsic to the agreement and what forms an intrinsic part of it. When a formal contract is drawn up and signed, care must be taken to distinguish between admissible background evidence relating to the nature and object of the contractual venture and inadmissible evidence of the terms for which each party was contending in the course of negotiations.”

In Sirius International Insurance Co. v FAI General Insurance Ltd and others [2004] UKHL 54, Lord Steyn said at paragraph 19: -

“There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, Lord Diplock, in an opinion concurred in by his fellow Law Lords, observed: “if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.” In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 771, I explained the rationale of this approach as follows:

“In determining the meaning of the language of a commercial contract … the law … generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.”

The tendency should therefore generally speaking be against literalism. What is literalism? It will depend on the context. But an example is given in The Works of William Paley (1838 ed), vol III, p 60. The moral philosophy of Paley influenced thinking on contract in the 19^th century. The example is as follows: the tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process. This approach was affirmed by the decisions of the House in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 775E-G, per Lord Hoffmann and in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913D-E, per Lord Hoffmann.”

I turn to consider the agreed list of sub-issues (paragraph (179) above).

Where Side Letter Agreements were duly concluded between the three parties, they contained contracts between FCI, Brasoil and the third party supplier concerned.

The Purchase Order referred to in the first paragraph was a reference to a contract between FCI and the third party supplier.

Brasoil was not party to the Purchase Order/contract between FCI and the third party supplier.

By signing a Side Letter Agreement FCI confirmed the existence of the Purchase Order/contract between FCI and the particular third party supplier.

It is elementary that the liability to pay sums due under the Purchase Order/contract between FCI and the particular third party supplier was owed by FCI to the third party supplier. But for liabilities assumed under the Side Letter Agreements, Brasoil was not liable to pay these sums to third party suppliers.

The first paragraph of the Side Letter contained an irrevocable obligation by Brasoil upon first written request to pay the third party supplier “any payment when due under the Purchase Order”. In order to secure payment the third party supplier had to make a written request to Brasoil in conformity with the terms of the first paragraph. This obligation was payable by Brasoil on first written request by the third party supplier (“subject always to aggregate of any and all such payments not exceeding” the sum specified in the Side Letter Agreement). To the extent that FCI signed ‘Request for Payment’ forms these provided confirmation that particular sums were payable by Brasoil to third party suppliers under the Side Letter Agreements.

By signing the Side Letter Agreements, FCI confirmed that Brasoil’s obligation was payable on first written request. By the second paragraph FCI “acknowledge[d] and agree[d] that any payment made by Brasoil hereunder shall as between FCI and Brasoil be regarded as [a] payment [by] Brasoil to FCI which may be recovered …”

Ms Prevezer confirmed on Day 5 that it is common ground that all payments made by Brasoil to third party suppliers (following submission of an invoice from the third party supplier) were made by Brasoil on behalf of FCI.

“Any payment made by Brasoil hereunder” was a reference to any payment made by Brasoil under the relevant irrevocable commitment to the third party supplier. “Any payment” meant any payment following a (conforming) written request, subject to the aggregate limit.

The second paragraph provided that “any payment made by Brasoil hereunder shall as between FCI and Brasoil be regarded as [a] payment [by] Brasoil to FCI which may be recovered [subject to the words in brackets] by Brasoil from FCI including, by way of deduction from any sums due to FCI from Brasoil under the provisions of the Supervision Agreement”. Thus (say Brasoil) the Side Letter Agreements provided that Brasoil was to be regarded as having made a payment to FCI which [subject to the words in brackets] Brasoil was entitled to recover from FCI, including (but not limited to) by way of deduction from any sums due to FCI from Brasoil under the provisions of the Supervision Agreement. FCI dispute this.

It is to be noted that sums due to FCI from Brasoil under the provisions of the relevant Supervision Agreement might be deducted by Brasoil. This is relevant to the construction of the “subject to” words in brackets (see below).

Brasoil’s claims in these proceedings are brought under the Side Letter Agreements. This extends to sums paid to third party suppliers including to Jurong. (In addition, where there is no Side Letter Agreement or the Side Letter Agreement was for a lesser amount than was paid, Brasoil also claims in restitution and on related bases). The analysis which follows assumes that payments were made by Brasoil to third party suppliers under Side Letter Agreements in the form set out above, and not under any other agreement or form of agreement. In my opinion on the true construction of the Side Letter Agreements, each Side Letter Agreement gave rise to an obligation on the part of FCI to repay to Brasoil such sums, if any, paid by Brasoil to a third party supplier following a (conforming) written request by the third party supplier, subject to the aggregate limit. I reject FCI’s contention that the form of Side Letter Agreement was not intended to create an obligation/liability on the part of FCI to repay to Brasoil the monies paid by Brasoil to a third party supplier pursuant to a Side Letter Agreement. The Side Letter Agreements did give rise to a debt on the part of FCI to Brasoil in respect of the monies paid by Brasoil to the third party supplier following a (conforming) written request, subject to the aggregate limit. This is what the Side Letter Agreement says.

To the extent that FCI signed ‘Request for Payment’ forms which contained the rubric set out in paragraph [125] above, this provides further confirmation for the analysis set out above.

[per the defendants] If the answer to 2.1 is in the affirmative, whether the obligation to repay on the part of FCI arises on (i) the date on which such sum, if any, is paid by Brasoil to the said supplier, (ii) the date of demand for repayment by Brasoil to FCI; or (iii) upon the settlement and reconciliation of all claims costs and expenses due to either party. [The claimants do not agree that it is appropriate to consider this issue now].

This issue has a bearing on interest calculations and is best left until after interlocutory or final judgment herein.

What is reserved by the words `subject to the settlement and reconciliation of all claims, costs and expenses…’ in the Side Letter Agreements. In particular,

In my opinion the words in brackets “(subject to settlement and reconciliation of all claims, costs and expenses due to either party which are hereby reserved”) are in wide terms. They mean all claims etc. due to either party in relation to the P38/P40 project as the case may be. I reject Brasoil’s submission that the “subject to” wording only enables FCI (when facing claims by Brasoil for repayment of sums paid to third party suppliers under the Side Letter Agreements) to set-off extra-contractual claims etc., not contractual cross-claims etc..

FCI’s claims etc. will include claims against Brasoil under clauses 6 and 8 of the relevant Supervision Agreement and quasi-contractual claims. The words “all claims, costs and expenses due” are wide in themselves and their width is confirmed by the words “including, by way of deduction from any sums due to FCI from Brasoil under the provisions of the Supervision Agreement”. Given that sums due to FCI from Brasoil under the provisions of the relevant Supervision Agreement might be deducted by Brasoil, it would be surprising (and contrary to the language used in the Side Letter Agreements) if “claims etc. due to either party” meant (if Brasoil was making a deduction) sums due to FCI from Brasoil under the provisions of the relevant Supervision Agreement, but if FCI was making a cross-claim, only extra-contractual claims. I do not consider that there is any ambiguity in the words in question. To the extent that it is appropriate to have regard to the factual matrix, there is nothing in the relevant matrix to justify a contrary conclusion.

The claimants contend that the Side Letter Agreements contained a contractual restriction on what may be set-off. The relevant principles are as follows.

Further the words “all claims, costs and expenses” do not include claims that FCI may have against Petrobras or FEI may have against Brasoil or Petrobras.

The Jurong Settlement Agreement provided so far as material: -

“The Agreed Costs of the Conversion Works and the Additional Works

Brasoil, JSL, FCI and FPCI agree that the sums due from FCI and FPCI respectively to JSL in respect of the Conversion Works and the Additional Works are as follows …

The “Amount Due Now” mentioned above in respect of both P40 and P38 shall herinafter be collectively known as the “Settlement Sum” (which Settlement Sum is US$82,566,780.78 being US$46,428,905.53 plus US$36,137,875.25).

…

Mechanism of Payment

At the request of FCI and FPCI, Brasoil agrees to pay the Settlement Sum, the Retention amounts for both P38 and P40 and all third party reimbursable cost to JSL in accordance with the terms of this Agreement and such payment shall be treated as made by Brasoil for and on behalf of FCI and FPCI.

Payment of the Settlement Sum and Third Party Reimbursable Cost

The last unit either P38 or P40 (as the case may be) to depart Singapore will only be delivered by JSL against receipt by JSL at its account No. 0001-000029-01-0-022 with DBS Bank Singapore of the entire Settlement Sum and all third party reimbursable cost in full for both P38 and P40 and without deduction whatsoever and not otherwise. …

Brasoil, FCI and FPCI expressly agree and hereby grant to JSL a lien over the last unit to depart Singapore (either P38 or P40 as the case may be) in respect of the entire Settlement Sum and all third party reimbursable cost due under this Agreement for both P38 and P40 … .

Amendment of the Contract Terms

The Settlement Sum represents the agreed balance of all amounts due to JSL in respect of the Conversion Works and the Additional works under the terms of the Sub-Contracts.

…

No More Claim

Brasoil, FCI and FPCI hereby agree and confirm that they have no further claim/backcharge whatsoever against JSL in respect of the Conversion Works and Additional Works and JSL hereby agree and confirm that they have no further claim/backcharge whatsoever against Brasoil, FCI and FPCI except for the agreed third party reimbursable cost.

…”

Clause 1 contains an agreement between Brasoil and FCI that the sums due from FCI to JSL in respect of the Conversion Works and the Additional Works are set out in Clause 1.

In respect of payments to Jurong, Brasoil rely on payments under Side Letter Agreements (not on payments under the Jurong Settlement Agreement) (see paragraph (224) above). It is accordingly not necessary to consider the effect of the words in clause 3 “such payments shall be treated as made by Brasoil for and on behalf of FCI and FPCI”. I have not investigated whether in fact Brasoil made relevant payments to Jurong under Side Letter Agreements as alleged.

In my opinion the Jurong Settlement Agreement does not preclude FCI (when facing claims by Brasoil under the Side Letter Agreements) from setting-off cross-claims, including in particular claims under paragraphs 6 and 8 of the relevant Supervision Agreement and in quasi-contract.

The relevant factual matrix against which the Side Letter Agreement and the Jurong Settlement Agreement fall to be determined.

In Scottish Power plc v Britoil (Exploration) Ltd The Times, December 2, 1997, Staughton LJ complained that often a great deal of evidence is produced under the heading of surrounding circumstances, background or factual matrix which contributes little or nothing to the understanding of the parties’ contract and so increases the cost of litigation. This case is a clear example of this problem. The Side Letter Agreements occupy half a page. I have set out the background facts at length because I consider that the work carried out by the parties will assist in the future case management of this litigation. The claimants have ranged far and wide in search of factual matrix such as to justify their case that the Side Letter Agreements reserve only ‘extra contractual claims, costs and expenses’. But this is not a case where there is any ambiguity in the words used in the document (drafted by experienced solicitors). I repeat the important guidance of Lord Phillips MR in The ‘Tychy’. Before taking extrinsic evidence into account, it is important to consider precisely why it is said to assist in deciding the meaning of what was subsequently agreed and to consider whether its relevance is sufficiently cogent to the determination of the joint intention of the parties to have regard to it. Words must be understood in their plain and ordinary sense. If the claimants had wished to narrow down the plain and ordinary meaning of the words ‘claims, costs and expenses’, this could easily have been achieved by appropriate drafting by their solicitors. I am, however, confident that the defendants would not have agreed to such a limitation. This is not a case where the words in question are to be understood in a special sense. Nor is this a case where extrinsic evidence is admissible to show that words are understood by participants in a particular market to have a special meaning or where words have by custom or usage a peculiar meaning (Chitty on Contracts, 29^th Edition, Volume 1, paragraph 12-121). The identity of the parties and the subject matter are not in issue. No equivocation arises. This is not a case of patent ambiguity.

In my judgment the true construction of the Side Letter Agreements is clear without an extensive trawl through the background.

The matrix of fact in the present case is (a) the Contract Structure and (b) the principal letters between the parties prior to 12 April 2000 setting out the parties’ respective contentions and claims and (c) the facts and matters set out above which it is common ground are relevant factual matrix.

For completeness I should record that it was common ground that the following important issue was not for determination in this hearing. Brasoil and FCI signed Change Orders which included these words: -

“THIS ADJUSTMENT INCLUDES THE ENTIRE COMPENSATION FOR CHANGES SET FORTH ABOVE. This adjustment includes but is not limited to compensation for engineering, materials, equipment, subcontracts, labor, overhead, profit, loss, on productivity, delays, disruptions, ripple effects, impacts, extra work, quantum merit, and/or equitable adjustment[s] as well as for further claims for compensation for any of them, resulting directly or indirectly from the change.”

The important issue that arises (not for determination in this judgment) is whether when the parties agreed a Change Order (including the “Total Cost of this Change”), the agreement contained in the Change Order precluded the defendants from claiming any further sums occasioned by delays, disruptions, ripple effects, impacts, extra work etc. resulting from or in any way occasioned by the extra works the subject of the particular Change Order.

The preliminary issues to be determined at this trial are set out in the Order of Moore Bick J of 18 March 2003 as amended on 5 May 2005: -

I answer issue (1) yes and issue (2) no.